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By ARTHUR TWINING HADLEY 



Railroad Transportation, Its History and Its 
Laws. 12°, pp. iv. + 269 . , . $1 50 

" Prof. Hadley's treatise is no less timely than it is valuable. 
. . Taken as a whole, the work is the result of an investiga- 
tion no less wide than exhaustive, and one possible only to a 
thoroughly equipped man, familiar with many modern languages." 
— The Nation. 

" Every page of the work bears witness to the thorough 
knowledge of the writer on the subject, and to his equal ability 
and practical sound sense in its discussion." — Literary World. 

Economics. An Account of the Relations between 
Private Welfare and Public Property. 8°, gilt 
tops Jiet $2 50 

" No higher compliment can be paid this work than to say that 
it is hard to determine whether the epithet ' judicial ' or ' judicious ' 
would more appropriately characterize it. . . . It will not only 
be found invaluable by readers ac large, but will also at once com- 
mand the attention and admiration of economists the world over." 
— Nation. 

" This work will be the standard text-book on political economy 
in America. . . . T' ; book will perform a great service to the 
whole community by clarifying thought on economic questions, 
and we hope to see it adopted :.-, a text-book in every American 
university." — N. V. Commercial Advertiser. 



G. P. PUTNAM'S SONS, new york and London 



\ 



ECONOMICS 

AN ACCOUNT OF THE RELATIONS BETWEEN 
PRIVATE PROPERTY AND PUBLIC WELFARE 



BY 



ARTHUR TWINING HADLEY 

President of Yale University ; sometime Labor Commissioner of the State 

of Connecticut ; Author of " Railroad Transportation, 

its History and its Laws " 



cM 



G. P. PUTNAM'S SONS 

NEW YORK LONDON 

27 WEST TWENTY-THIRD STREET 24 BEDFORD STREET, STRAND 

S^e 'i^uiickErboclur %hcs% 
1899 



48461 

Copyright, i8 



G. P. PUTNAM'S SONS 
Entered at Stationers' Hall, London 










^ ^Asm^'f' 



Ube ftntclierbocfcet pre ■?8, "Hew IRocbelle, 1*. BJ. 



PREFACE. 



This book is an attempt to apply the methods of 
modern science to the problems of modern business. 
i; Within the last thirty years there have been important 
changes in economic theory. One school of investigators 
has employed the principle of natural selection to explain 
the development and present shape of industrial ideas and 
institutions. . Another school has used some of the results 
.of recent psychological study to account for the actions 
of individual men in pursuing their own interests under 
the ideas and institutions thus developed. Both these 
things have combined to make the economic science of 
the present day -very different, in its methods of analysis 
and powers of explanation, from that which formed the 
basis of John Stuart Mill's Principles of Political Economy. 

Meantime newproblems have been developing in modern 
business life ; most conspicuously, perhaps, in connection 
with large investments of capital in factories and railroads. 
The time which elapses between the rendering of labor 
and the utilization of the products of labor is now so long 
that the work of the speculator has far greater importance 
than it did a generation ago. The size of the units of 
capital is so large that free competition often becomes an 
impossibility, and theories of economics which are based 
upon the existence of such competition prove blind guides 
in dealing with modern price movements. We have to 
study, far more closely than we once did, the effect of 
combinations upon the interests of the consumers on the 
one hand and the laborers on the other; to examine the 



IV ECONOMICS. 

results of meeting organizations of capital with organiza- 
tions of labor, and of controlling them by special legisla- 
tion or by direct government ownership. We have to 
deal with socialism, not as the theory of a few visionaries 
who try to destroy property rights, but as a series of 
practical measures urged by a large and influential body 
of men who are engaged in extending the functions of 
government. 

There is no general work in the English language which 
deals at all comprehensively with these problems of modern 
economics. As long as Marshall's book remains incom- 
plete there is nothing which attempts to do for the readers 
of to-day that which Mill did with such signal success for 
those of half a century ago. The field thus left open I 
have tried to cover to the best of my ability in the book 
now offered to the public. It is written for students — that 
is, for those readers who are willing to give the time and 
trouble necessary for understanding subjects which are at 
once important and perplexing. In a professional ex- 
perience which has been about equally divided between 
the editorial room and the lecture room, I have generally 
found that, barring certain necessary differences in form 
of presentation, what is good teaching in one place is 
good in another. I have attempted to make the book 
available for students in the broad sense of the term as 
well as in the narrow sense ; for those who are engaged 
in doing the world's work as well as for those who are 
preparing themselves to do it. 

I have put things as plainly as I could ; but there are 
some parts of economics where no amount of effort by 
an author will relieve the reader of the necessity of do- 
ing independent thinking on his own account. There 
are many problems of business life which are so compli- 
cated in reality that it is unwise to treat them as if they 
were simple. There is no foundation for the popular be- 
lief that questions of money, of the tariff, or of the rela- 



PREFACE. V 

tions between labor and capital, are easy to understand if 
properly presented. The simplicity obtained by looking 
at them from one side only is apt to be secured at the ex- 
pense of thoroughness and too often of candor. 

Dealing as the book does with matters of active contro- 
versy, sometimes clouded by party loyalty or by personal 
interests, I am far from expecting everyone to agree with 
its conclusions. But I trust that everyone will recognize 
my intent to state both sides of disputed questions as 
clearly as possible, and to treat the controversies as an 
arbiter rather than as an advocate, even in those cases 
where the arguments on one side have seemed decidedly 
stronger than those on the other. 

Where these controversies involve important differences 
of legislative or commercial policy, the arguments have 
been presented in the text of the book ; where they in- 
volve differences of explanation or theory rather than of 
practice, they have been outlined in the foot-notes. These 
notes are not to be regarded as exhaustive discussions of 
economic theory, but as summaries of opinion on contro- 
verted points, which may serve to pave the way for 
detailed study on the part of those who are interested 
to pursue the subject farther than the limits of the pres- 
ent book will allow. 

Without going into the more complicated details of 
modern mathematical economics, I have occasionally 
employed diagrams in cases where they seemed neces- 
sary for a thorough explanation of the subject. For 
most people who are likely to use this book I am con- 
fident that time spent in studying the diagrams will be 
more than repaid. I have used one of Cournot's methods 
of presentation, not because it is any better than those 
employed by his successors, but because it is simpler. 

The separation which is made in so many modern 
books between economic theory and economic practice 
seems to me a mistake. I have tried to keep theory and 



VI ECONOMICS. 

application together; and, just as far as possible, to make 
the study of practical problems a means of developing 
and explaining scientific theories. Where this method 
can be employed it gives increased interest to the study 
of economics ; and, what is still more important, it guards 
us in some measure against the danger of disproportion- 
ate and one-sided deductions from certain parts of eco- 
nomic science, to which the student is always hable if he 
develops his theory first and makes its practical applica- 
tions afterward. No writer on economics has had as wide 
an influence as Adam Smith ; and while Smith's power 
was in large measure due to those personal qualities in 
which he stands pre-eminent, it was in perhaps equal 
measure due to his habit of keeping theory and practice 
closely combined. People studied his reasoning carefully 
because it was applied to things which they really wanted 
to understand, and was constantly supported by an appeal 
to the observed facts of business life. 

I am very far from trying to substitute economic his- 
tory for economic theory. In a book like this, the ex- 
planations are the important thing ; the presentation of 
facts is not an end in itself, but a means of making the 
explanation clear and comprehensive. The reader will be 
disappointed if he expects to find a complete and well- 
ordered history of the financial and industrial policy of 
various nations. For such a history, he should look to 
the various works that deal with the special departments 
of finance, commerce, or industry. A work like this is 
designed to enable him to make use of such books, not 
to dispense with them. 

In thus connecting theory and practice and giving due 
prominence to the work of the speculator in modern in- 
dustry, I have found myself obliged to abandon the time- 
honored division of the science into the departments of 
production, distribution, exchange, and consumption. 
The subjects which are commonly treated under the 



PREFACE. Vii 

head of production are chiefly found in chapters ii, v, 
and vi ; those which are commonly treated under the 
head of exchange will be found in chapters iii, iv, vii, and 
viii ; while the last six chapters deal principally with 
questions of distribution, and incidentally with those of 
consumption. 

My obligations to previous writers, in general and in 
detail, are something which I cannot possibly express in 
full. When a scientific principle is specially identified 
with the name of some particular author, I have taken 
pains to credit it to its proper source — especially in the 
case of work which, from its newness or for any other 
reason, has not become part of the general stock of 
economic discussion. In other cases, I have limited my 
citations to those books which are likely to prove most 
accessible and useful to the reader who desires to pursue 
special subjects farther than can be done within the 
limits of a general text-book. The titles of such books 
have been for the most part placed at the head of the 
chapters bearing on the specific subjects with which they 
deal ; thus forming a bibliography which, while very in- 
complete, may yet prove serviceable to some readers. 
Other things being equal, I have included works which 
are written in English, rather than in foreign languages, 
and have cited English translations rather than originals. 

I am indebted for material aid to my colleagues Messrs. 
Irving Fisher and J. C. Schwab ; and still more to my wife, 
on whom I have depended both for criticism and for assist- 
ance at every stage of the work. 

Yale University, New Haven, 
March, 1896. 



/■ 



CONTENTS. 



CHAPTER I, 

PAGE 

Public and Private Wealth ..... i 
Preliminary Definitions — Development of Economic Science — 
Individualism and Socialism — Standards of Public Good. 

CHAPTER II. 

Economic Responsibility . . . . . 26 

Slavery — Property — Emancipation — The Persistence of Poverty 
— The Malthusian Theory — Poor Relief — Compulsory Insurance. 

CHAPTER III. 

Competition ........ 64 

Freedom of Exchange — Bargaining — Mercantile Competition — 
Market Price — Effects of Competition — Normal Price — Value — 
Socialistic Theory of Value. 

CHAPTER IV. 
Speculation . . . .' . . . -97 

Gambling — Insurance — Commercial Speculation — Legitimate 
and Illegitimate Transactions — Industrial Speculation — Func- 
tions of the Capitalist. 

CHAPTER V. 

Investment of Capital ...... 121 

The Wage System — Private Land Ownership — Patent Right — 
Legalization of Interest — Usury Laws — Limited Liability. 



X ECONOMICS. 

CHAPTER VI. 

PAGE 

Combination of Capital . . . . .151 

Modern Tendencies toward Monopoly — Their Effect on Prices — 
Limitation of Profits — Laws Fixing Rates — Problems of Rail- 
road Regulation — Enforcement of Responsibility. 

CHAPTER VIL 

Money . 180 

Its Functions and Forms — Seigniorage — Depreciation — The 
General Level of Prices — Conflicts between Debtor and Creditor 
— Bimetallism in Theory and in History — Irredeemable Paper 
Money. 



232 



CHAPTER VIII. 
Credit .'......... 

Checks and Clearings — Domestic and Foreign Exchange — In- 
fluence of Deposit Accounts on Prices — Note Issue and its 
Dangers — Attempts to Regulate Note Issue — The Government 
as a Banker. 

CHAPTER IX. 

Profits , 264 

Competition among Investors — The Rate of Interest — Causes of 
Variation — Economic Rent — Net Profits and Losses — Commer- 
cial Crises. 

CHAPTER X. 

Wages 301 

Piece-Wage and Time-Wage — What Constitutes Demand for 
Labor — The Popular Theory — The Wage-Fund Theory — 
The Residual Theory — The Laborer as a Consumer — Wages 
Depend on Maximum Economy of Consumption — With Some 
Men this is Obtained by Low Wages and Low Efficiency, with 
Others by High Wages and High Efficiency. 

CHAPTER XL 

Machinery and Labor 336 

Alleged Displacement and Degradation of Labor — Factory Acts 
— Labor Organizations — Old aud New Methods — Compulsory 
Arbitration — The Living Wage. 



\ 



CONTENTS. XI 

CHAPTER XII. 

PAGE 

Cooperation ........ 370 

Profit-Sharing — Producers' Cooperation — Forms of Consumers' 
Cooperation — Government Management of Industrial Enter- 
prises. 

CHAPTER XIII. 

Protective Legislation ...... 404 

The Eight-Hour Movement — The Contract System — Prison 
Labor — Foreign Immigration — Protective Tariffs — The Popular 
Argument — The Development of Infant Industries — Political 
and Military Questions Involved. 

CHAPTER XIV. 

Government Revenue . . . . . . 447 

Its Different Forms — Principles of Taxation — Certainty the Pri- 
mary Object — Incidence of Taxation — Direct and Indirect Taxes 
— Property and Income Taxes — Progressive Taxation — The 
Single Tax— Public Debts. 



ECONOMICS: 

AN ACCOUNT OF THE RELATIONS BETWEEN PRI- 
VATE PROPERTY AND PUBLIC WELFARE. 



CHAPTER I. 

PUBLIC AND PRIVATE WEALTH. 

Preliminary Definitions — History of Economic Science — Individualism and 
Socialism — Standards of Public Good. 

Luigi Cossa : "An Introduction to the Study of Political Economy"; 
translated by L. Dyer. London, 1893. An admirable history and bibli- 
ography. Its title is a little misleading, as the book is of more use to 
advanced students than to beginners. 

J. N. Keynes : " The Scope and Method of Political Economy." Lon- 
don, 1891. 

Among the many critical histories of socialism the most useful is perhaps, 
that of John Rae : 2d ed., London and New York, 1891. A good pres- 
entation of the ideas and aims of moderate socialists is given in " Fabiaa 
Essays in Socialism" ; edited by G. B. Shawr. London, 1890. New York, 
1891. For a brief statement of extreme individualistic views see W. G. 
Sumner: "What Social Classes Owe to Each Other" New York, 1883; 
for a fuller development, W, Donisthorpe : " Individualism " London, 
1889. 

§ I. In the Middle Ages questions of industrial policy 
were treated by most writers as incidental details in a sys- 
tem of theology or of law. But in the sixteenth and seven- 
teenth centuries people began to separate the study of 
matters affecting a nation's commerce and finance from 
the more general consideration of its politics or its morals, 



2 PUBLIC AND PRIVATE WEALTH. 

and to develop an art oi political economy which, should 
guide the statesman in his efforts to promote public wealth, 
as the arts of personal and industrial economy guide the 
individual in his pursuit of private wealth. In their at- 
tempts to formulate the rules of this art, writers of the 
eighteenth century discovered certain laws which are the 
basis of the modern science of economics. 

§ 2. But what is public wealth ? 

In the first place it is not the same thing as government 
property. It is something far wider. The individual 
citizens are a part of the nation just as much as the 
government is ; their property, no less than that of the 
government, must be included in any rational attempt 
to estimate the industrial resources of the commun- 
ity. Waterworks and railroads owned by private com- 
panies are just as much part of the public wealth as are 
municipal waterworks or national railroads. Whether 
the public wealth is likely to be increased in any particu- 
lar case as an indirect result of making more of it public 
property, can only be decided by examining the circum- 
stances of that case. It will depend upon how well such 
property is managed. If the agents of the government 
are disinterested and wise enough, the public property 
will probably be made to render more service than pri- 
vate property ; if they are not disinterested and wise, it 
will probably be made to render less service. In the 
latter case, the " nationalization " of a piece of property 
will tend to diminish the public wealth instead of increas- 
ing it. 

§ 3. Nor can we estimate the public wealth of a nation 
by taking the sum of the property of its individual mem- 
bers. Many things like pure air and abundant water sup- 
ply, which form most valuable elements of public wealth, 
are hardly counted as private property at all. A property- 
right is a title to part of the public wealth ; but the 
amount of these titles outstanding forms no indication 



THE DISTINCTION ILLUSTRATED. 3 

of the amount of enjoyment which the pubh'c can com- 
mand. The exchange value of a property-right is con- 
nected with its exclusiveness. It depends not so much 
upon the enjoyment which the property can be made to 
afford as upon the completeness with which its owner can 
monopolize that enjoyment for himself or his friends to 
the exclusion of the general public. 

The total value of these rights of exclusion does not 
necessarily correspond in any way with the resources avail- 
able for the public. It is quite misleading to measure a 
nation's wealth by a census of the property of its mem- 
bers. Property-rights may be created without increas- 
ing public wealth or destroyed without diminishing it.' 
Under the English system of enclosures, land which had 
formerly been free to all the public was made the subject 
of private ownership. By this practice there was a crea- 
tion of property-rights without production of wealth. 
The landlords now had something valuable which could 
be bought or sold and which did not exist before ; but 
the wealth of the community was in no wise increased. 
There were no more means of enjoyment in existence 
than there had been previously. On the other hand, the 
abolition of slavery involves a diminution of private 
property without a corresponding loss of plublic wealth. 
It sweeps away an enormous mass of exchangeable wealth 
of individuals. Systems of compensation to the owners 
of such wealth, though they may shift the burden, can- 
not annul the loss. Yet such a loss is simply a destruc- 
tion of titles and transferable rights. It does not destroy 
means of happiness. The wealth of the community, 
judged by public standards, is as great after abolition as 
itwwas before. 

A curious instance where loss of private wealth went 
hand in hand with gain in public wealth is furnished by 
the history of the waterworks in the city of Venice. For- 
' But see S 12. 



4 PUBLIC AND PRIVATE WEALTH. 

merly water was so scarce that it commanded a price^ 
and a good well was a source of considerable private 
wealth to its possessors. But when an abundant supply 
of water was furnished at slight cost, the commercial 
character of the water changed, and it could under all 
ordinary circumstances be had for nothing. But the very 
abundance of water, which makes it commercially worth 
nothing, is an element of public wealth ; and the scarcity 
which makes it a valuable article of property is a symptom 
of public poverty. 

The high price of real estate in New York City, which 
forms an enormous item of private wealth, is partly con- 
nected with causes that promote the public wealth and 
partly with those that antagonize it. So far as it is due 
to the excellence of the harbor and other things which 
make New York an admirable trade centre, it connotes 
a public good. So far as it is connected with the narrow- 
ness of Manhattan Island and other things which limit 
the number of people who can most conveniently avail 
themselves of these privileges, it connotes a public evil. 

§ 4. Improvements in the arts have had a beneficial 
effect on the public wealth of nations wholly out of pro- 
portion to any gains which they have enabled individu- 
als to appropriate for their own exclusive advantage. 
This benefit cannot be measured in money. If an improve- 
ment enables the same number of laborers to produce 
twice the amount of useful products, it may happen that 
the price of each product will fall one half. In this case 
there is no apparent gain in private wealth ; but if the 
article is a really useful one, there is a great gain in 
public wealth and social well-being through its increased 
abundance. 

The true basis for an estimate of a nation's wealth is to 
be found in the enjoyments of its members. The wealth 
of a community does not depend on the money value of 
its means for such enjoyment, nor even on their physical 



INCOME AND CAPITAL. 



5 



amount, but on their utilization. Public wealth is " a flow 
and not a fund " ; it is to be measured as income and not 
as capital. 

§ 5. The distinction between capital and income as 
modes of ineasiiring ^ resources is almost as important as 
the distinction between public and private wealth, and is 
quite as much neglected in current economic discussion. 

If a man for a series of years earns $10,000 a year and 
spends it all, he is always rich in one sense, and never in 
another. He has much income and no capital — unless 
we stretch the idea of capital wide enough to include the 
skill which enables him to earn the large income. In like 
manner a nation whose members habitually produce much 
and consume much, will have large enjoyments and small 
accumulations. Measured as income its public wealth 
will be large ; measured as capital it will be small. 

The distinction between capital and income is not due 
to a difference in the things themselves, but to a differ- 
ence in methods of measurement. The capital of an 
individual or a community is an amount of wealth in 
existence at a particular moment. The income of an 
individual or a community is an amount of wealth ob- 
tained during a specified period. Capital is being con- 
stantly converted into income and income into capital. 
But capital, under all times and conditions, is measured 
as a quantity, while income is more properly measured as 
a rate. Capital is a static conception, independent of 
time ; income a dynamic conception involving the time 
element. 

We see this distinction illustrated in the balance 
sheets of any large industrial enterprise. The capital 
account of a railroad company gives the property which 
it owns at a particular moment — road, equipment, land, 

' For the development of this distinction, which involves a combination 
of the ideas of Knies and Newcomb, I am much indebted to my colleague 
Dr. Irving Fisher. 



6 PUBLIC AND PRIVATE WEALTH. 

buildings, stocks of other corporations, accounts payable, 
materials and cash on hand. The income account gives 
its earnings during the year preceding — from passengers, 
freight, mail, express, and other sources. The two ac- 
counts deal with the same road, but with a totally differ- 
ent set of items ; and while the amount of the one has a 
great influence on the other, there is no direct connection 
between the two. 

§ 6. As a matter of pure mathematics, a quantity of 
capital and a rate of income should be as incommensur- 
able as a line and an angle. In practice, however, we 
are constantly comparing the two. The rate of interest 
furnishes a basis on which we compare and exchange 
capital and income with one another. If we say that the 
rate of interest is five per cent, we mean that we regard 
an income of five dollars a year as equivalent to a capital 
of a hundred dollars. The causes which determine this 
basis of comparison are extremely complicated ; they are 
treated at length in chapter ix. 

§ 7. Of the two methods of measuring wealth, the in- 
come standard is of more primary importance ; that of 
capital is secondary. Accumulations of capital have their 
chief usefulness as means of producing income. For this 
reason the term capital is confined in ordinary usage to 
things which are valued in connection with productive 
industry. As thus limited, the word capital, in its public 
sense, means wealth used for producing more wealth. A 
nation's capital consists mainly of food, necessary cloth- 
ing and shelter, materials, machinery, means of transporta- 
tion, and instruments of exchange. It is impossible to 
say just which objects are capital and which are not. It 
is very far from being possible to form an accurate money 
valuation of the amount of such capital. On the other 
hand, private capital is property used for acquiring more 
property. We can tell with substantial accuracy what 
property each individual is using as capital, and can esti- 



DIFFERENT MEANINGS OF CAPITAL. y 

mate its money value very closely. Just as the acquisi- 
tion of property is usually attended with production of 
wealth, so the investment of property as private capital 
is usually attended with accumulation of public capital. 
But there are cases where one takes place without the 
other. The burglar's outfit or the roulette table of the 
gamester is private capital — property used for acquiring 
more property ; but it certainly is not wealth used for 
producing more wealth. On the other hand, the pioneer 
in science often adds greatly to the wealth of the country 
by the use which he makes of existing wealth ; but the 
cases are very rare where he increases his property in so 
doing, or where the attempt to acquire property is a 
dominant motive in directing his action. Public capital is 
not the sum of the private capital of individuals, any more 
than public wealth is the sum of individual property rights. 
Public capital consists of useful things ; capital goods, as 
Clark calls them. Private capital consists of titles and 
rights to a part of those things.' The increase or diminu- 
tion of such titles is not synonymous with an increase or 
diminution of the things themselves. 

§ 8. The relations between the different forms of wealth 
may be summed up as follows : 

' Some economists, who see that there is a distinction of this kind, fail to 
recognize its true nature. Both Marx and Clark, for example, speak of 
capital as a permanent thing, independent of the transmuted and changing 
goods of which it is at each moment composed. But Clark regards this 
thing as permanently productive and its increase as normal and natural ; 
while Marx regards it as an unproductive dead-weight, whose increase is a 
spoliation of the laborer. But what is this thing which is permanent while 
the goods change ? It is nothing else than the titles to property in process 
of industrial transmutation ; titles which carry with them the control and 
direction of the process. Whether the existence of these titles increases the 
production of the community depends on the wisdom with which the con- 
trol is exercised. They are not necessarily productive as assumed by Clark ; 
still less are they necessarily unproductive as held by Marx. They are more 
likely to be productive than not, because our industrial arrangements are 
such that, if men fail to use their capital for things the community needs, they 
lose money and are eliminated from control of the next period of production. 



8 PUBLIC AND PRIVATE WEALTH. 

Wealth in the public sense consists of all means of en- 
joyment, whether they have a commercial value or not. 
The use obtained from these things in a given period is 
the public income for that period. The amount in exist- 
ence at any given moment is the public capital at that 
moment in the broadest sense of the word. But it is cus- 
tomary to confine the term capital to wealth which is 
actually used for producing more wealth. 

Wealth in its private sense, better designated as prop- 
erty, consists of rights to part of the public wealth. The 
amount of such rights which accrues to any person in a 
given period is his income for that period. The aggre- 
gate amount which he has at any moment is his capital in 
the broadest sense of the word. But here again it is cus- 
tomary not to apply the term capital to a man's whole 
property, but to confine it to that part which he uses as a 
means of acquiring more property. 

§ 9. These distinctions are something which the student 
of economics must master at the very outset. This is not 
so easy as it appears. The political economists of the six- 
teenth, seventeenth, and early part of the eighteenth cen- 
turies habitually confused public and private wealth. The 
theories of that time constitute what is known as the 
mercantile system of political economy, because they in- 
volve the idea that a nation should strive to make money 
in the same manner as an individual merchant. Just as a 
prudent business man so manages his affairs as to produce 
more than he consumes and make money by the excess 
of his sales over his purchases, it was thought that a pru- 
dent statesman should so manage the affairs of the nation 
as to make it produce more than it consumes and export 
more than it imports. It was considered by many that 
this excess of exports over imports constituted an index 
of national prosperity and the true measure of the in- 
crease of national wealth. Just as the money which an 
individual has made represents his power of industrial 



MERCANTILISTS AND PHYSIOCRATS. 9 

control over other individuals, it was thought that the 
money which a nation had thus saved represented its 
power of control over other nations. In fact, no small 
part of the commercial legislation of all countries has 
been framed under the influence of these ideas. 

§ 10. The error of the mercantile system was pointed 
out by a school of French economists known as physio- 
crats, because they laid stress on the powers of nature as 
the basis of national prosperity and public wealth. These 
economists indicated that the true source of national 
power lay, not in the supply of gold or silver, but in the 
supply of food ; not in the power to command other na- 
tions' labor, but in the power to develop its own labor. 
A nation might be prosperous with very little money /^r 
capita. This would simply result in a lower scale of 
prices. But with little food per capita great misery and 
industrial inefficiency must inevitably follow. Instead of 
encouraging manufactures, as the mercantile school has 
done, the physiocrats were led to undervalue them. No 
manufacture, they said, could exist except on the basis of 
a surplus of food produced by the agricultural laborers ; 
and the real cost, not to say the real worth, of every 
manufacture was measured by the amount of food con- 
sumption which it represented. Food was therefore the 
true measure of wealth, no less than the true source of 
national prosperity. 

§ II. This was a great advance from the conception of 
wealth embodied in the mercantile system. But the 
physiocrats made a mistake in laying too much stress 
on the quantity of food as a measure of public wealth 
and too little on its utilization. The prosperity of a 
nation depends far more upon the use made of its wealth 
than upon the amount of such wealth in existence at 
any time. The public income is not represented by an 
amount of money, but by a series of purchases made 
with that money ; not by an amount of unconsumed 



lO PUBLIC AND PRIVATE WEALTH. 

food, but by a series of things made and used by those 
who consume it. A nation which has a large amount of 
capital and utilizes it badly may be far less prosperous 
than one with a smaller capital which it transmutes more 
rapidly. 

The full importance of this process of transmutation 
was first recognized by Adam Smith, whose Inquiry Into 
the Nature and Causes of the Wealth of Nations, published 
in 1776, is usually regarded as the starting-point of modern 
political economy.^ He agreed with the physiocrats in 
their strictures on the mercantile system, but his concep- 
tion of public wealth was broader and truer than theirs. 
He also showed, far more clearly than any of his prede- 
cessors, the relation between the pursuit of private wealth 
and the utilization of public wealth. He proved that the 
former was a most powerful agency for furthering the lat- 
ter ; that the actions of men in their pursuit of money- 
making were a means of serving others even when they 
had no intention or consciousness of so doing. Modern 
economists have followed in the lines laid down by Adam 
Smith. Their inquiry into the causes of the wealth of 
nations has connected itself with an inquiry into the 
results of the property rights of individuals and the 
motives connected with them. This twofold aspect of 
the science is recognized in the definition given on the 
title-page of the present work, — An Account of the Rela- 
tions between Private Property and Public Welfare. 

§ 12. The perception of this relation between the ac- 
quisition of property and the production of wealth has 
had several important consequences. In the first place, it 
has changed the attitude of the public mind toward trade. 
In ancient times trade was regarded as a fight between 
buyer and seller ; to-day it is looked at as a means of 

' The best edition is that of J. E. Thorold Rogers, Oxford, 1880. W. 
J. Ashley has published an excellent abridgment (New York and London, 
1891), which presents the most important parts in very narrow compass. 



MODERN VIEWS OF MONEY-MAKING. II 

mutual service. To the mediaeval economist the business 
man was a licensed robber; to the modern economist he 
is a public benefactor. Five hundred years ago it was 
thought that a man could make money only by buy- 
ing goods for less than they were worth, or by selling 
them for more than they were worth ; that each business 
transaction involved the temptation to cheat ; and that if 
a man was successful in business it showed that that 
temptation had . been too much for him. To-day we 
believe that money is made on a large scale by doing the 
public a service. If a man's goods command a high price 
we assume that he has met an actual need. If this price 
furnishes him a large margin of profit, we believe that he 
has so organized the labor under his control as to diminish 
not only his own expenses but the actual labor cost of 
producing the goods. So confident are we of the substan- 
tial identity of interest between the business man and the 
community as a whole, that we give our capitalists the 
freest chance to direct the productive forces of society to 
their own individual profit. Even the mistakes of private 
enterprise may prove a means of progress to society, since 
they show at comparatively small cost what is to be 
avoided in the future.' 

§ 13. A second result is a change in the attitude of 
economists toward state interference. When people 
thought that every business man was trying to serve him- 
self at the expense of the community, a large number of 
restrictions of all kinds were brought into play. The 
commercial legislation of past centuries was a mass of 
such restrictions. Adam Smith and his successors showed 
that the bulk of this legislation had a very different effect 
from what was intended. Instead of preventing extortion, 
it prevented mutual service. Instead of enabling the 
nation as a whole to make money, it interfered with the 

^ Compare J. S. Mill, " On Liberty," London, 1839 I John Morley, " On 
Compromise," London, 1877. 



12 PUBLIC AND PRIVATE WEALTH. 

development of its resources and the wise application of 
its labor. To so great an extent were the economists 
able to point out the evil results of mistaken legislation, 
that in the popular mind the teaching of economics has 
become synonymous with the effort to reduce the activity 
of government to a minimum. The phrase Laissez faire, 
laissez passer (let things take their own course), which 
was the motto of the physiocrats, has taken an exagger- 
ated hold on the public imagination, and has been regarded 
as a fundamental axiom of economic science, when it is in 
fact only a practical maxim of political wisdom, subject to 
all the limitations which experience may afford. 

§ 14. A third result is to make people treat political econ- 
omy as a science instead of an art. The earliest students of 
the subject thought that political economy was the art of 
managing the business affairs of a community in the same 
way that domestic economy is the art of managing 
the business affairs of a household. The modern econo- 
mist rejects the idea of paternalism involved in this 
conception. He sees that the attempts of government 
authorities to manage the economy of a nation, however 
well meant, are apt to defeat their own ends ; that the 
growth of national wealth depends upon causes far deeper 
and more powerful than those which the statesman or 
legislator can control ; and that more is to be accomplished 
by trying to observe and study these causes than by seek- 
ing to repress their operation. In this modern view we 
are able to develop a true science of political economy. 
It is one which concerns itself primarily with explanations 
rather than precepts. It bears the same relation to the 
arts of statesmanship and legislation that the science of 
physiology bears to the art of medicine, or the science of 
mechanics to the art of engineering. It does not prescribe 
to the statesman or legislator exactly what he shall do, as 
the ancient art of political economy would have attempted ; 
but it indicates limits which he cannot pass without 



ECONOMIC LAWS. 1 3 

defeating his own ends. Economics does not say that all 
men must be left free to make their own contracts, any 
more than mechanics says that all buildings must be con- 
structed on geometrical patterns. But each science sets 
forth the conditions of stability and the laws of structural 
strain, which the statesman or the builder disregards at 
his own peril. 

§ 15. In the modern conception of economics the word 
law is necessarily used in two quite distinct senses. In 
the majority of cases the economist is primarily occupied 
with establishing and investigating natural laws, or ob- 
served sequences of cause and effect. In spite of indi- 
vidual variations, it is now recognized that the average or 
typical conduct of masses of men operates with a high 
degree of regularity. The modern science of statistics is 
based on the existence of such regularity, and concerns 
itself exclusively with natural laws of this kind. But the 
economist also includes in the scope of his investigations 
the positive laws or commands relating to wealth, whether 
moral or jural in their character ; the former deriving 
their authority from the moral sentiments or religious 
beliefs of the community, while the latter are promulgated 
and enforced by the government. 

§ 16. With the growth of these modern ideas of sci- 
entific method, the name economics, which is essentially 
that of a science, is gradually being substituted for the 
older term political economy, which was in some respects 
more applicable to an art. 

§ 17. It was not by mere chance that the Declaration 
of Independence and the Wealth of Nations were pub- 
lished at so nearly the same time. Each involved the 
recognition of the same principle in different fields of 
human activity. In modern politics we have seen that 
society is better governed by allowing individuals, as far 
as possible, to govern themselves. In modern economics 
we have seen that society is made richer by allowing 



14 PUBLIC AND PRIVATE WEALTH. 

individuals, as far as possible, freedom to get rich in their 
own ways. Each of these principles has its limits ; but 
each marks an immeasurable advance, in politics and in 
economics, over the system of police government which 
had preceded it. 

This development of individualism in economics is part 
of the general trend of modern thought and modern life. 
A few centuries ago, the principle of individual freedom 
was not recognized in law or in morals, any more than in 
trade. It was then thought that liberty in trade meant 
avarice, that liberty in politics meant violence, and that 
liberty in morals meant blasphemous wickedness. But 
as time went on, the modern world began to see that this 
old view was a mistake. Human nature was better than 
it had been thought. Man was not in a state of war with 
his Creator and all his fellow-men, which it required the 
combined power of the church and the police to repress. 
When a community had achieved political freedom, its 
members on the whole used that freedom to help one 
another instead of to hurt one another. When it had 
achieved moral freedom, it substituted an enlightened 
and progressive morality for an antiquated and formal 
one. When it had achieved industrial freedom, it sub- 
stituted high efficiency of labor for low efficiency, and 
large schemes of mutual service for small ones. Con- 
stitutional liberty in politics, rational altruism in morals, 
and modern business methods in production and dis- 
tribution of wealth have been the outcome of the great 
individualistic movement of the nineteenth century. The 
individualist has taught people not to confound public 
morality with a state church, public security with police 
activity, or public wealth with government property. He 
has taught men that, as society develops, the interests of 
its members become more and more harmonious ; in 
other words, that rational egoism and rational altruism 
tend to coincide. In fact his chief danger lies in exag- 



INDIVIDUALISM AND SOCIALISM. 1 5 

gerating the completeness of this coincidence in the 
existing imperfect stage of human development, and in 
believing that freedom will do everything for society, 
economically and morally. He is prone to assume that 
private property would necessarily be managed in the 
public interest, and is in danger of treating the increase 
of such property as a good in itself instead of a means to 
the public good.' 

§ 1 8. These mistakes and exaggerations of individualism 
have afforded a legitimate field for socialistic criticism. 
A socialist, in the proper definition of the word, is a man 
who distrusts these conclusions of the individualist and 
who believes that the loss from the exercise of individual 
freedom in most of the debatable cases outweighs the 
gain. Scientific socialists have done admirable work in 
pointing out where the evils arising from individual free- 
dom may exceed its advantages, and when society must 
use its collective authority to produce the best economic 
and moral results. Men of this type must recognize that 
the point of issue between individualism and socialism is 
not a question of ends, but of means. Both sides have 
the same object at heart, namely, the general good of 
society. One side believes that this good is best achieved 
by individual freedom in a particular line of action ; the 
other side believes that the dangers and evils with which 
such freedom is attended outweigh its advantages. 

§ 19. Unfortunately the contest between individual- 
ists and socialists has not been carried on in a spirit 
which could lead to mutual understanding. The individ- 
ualist is apt to regard the socialist as revolutionary, in 
the face of the fact that in conservative countries like 
England a great many of the ideas of socialism have been 
carried out by constitutional methods and in the most 

' An illustration of this danger is seen in the writings of the brilliant 
French economist Bastiat, whose "economic harmonies" are sometimes as 
overstrained as the " economic antinomies " of socialists like Proudhon. 



1 6 PUBLIC AND PRIVATE WEALTH. 

peaceable fashion. The sociahst is apt to regard the in- 
dividuahst as hard-hearted and immoral, in the face of the 
fact that the group of individualist thinkers at the close 
of the last century, headed by Jeremy Bentham, did more 
to promote practical morality and enlightened care for 
the unfortunate than had been accomplished for centuries 
previous. The socialist thinks that the individualist's 
ideal of a good citizen is the " economic man," solely oc- 
cupied with the pursuit of wealth, whom some economists 
have used as a lay figure on which to exhibit their deduc- 
tions. He charges the individualist with glorifying the 
pursuit of wealth and making it the chief end of man. 
This is exactly the reverse of the truth. The individual- 
ist views the pursuit of private wealth, not as an end, but 
as a means to the general well-being of society. He 
shows that the effort to make money is a most powerful 
incentive to work in the service of the community — in 
fact the most powerful incentive the world has yet known ; 
and that within certain limits the commercial success or 
failure of an enterprise is dependent upon the question 
whether the community needs it. To this extent he may 
be said to glorify the pursuit of wealth, in showing that it 
is a means of mutual service instead of nlutual robbery, 
an honorable ambition instead of a base one. But in thus 
elevating it to its proper place in the social order, he alsa 
reduces it to its proper place. By understanding the uses 
of the commercial system, he is able the more effectively 
to criticise its abuses. The day is past, if ever there 
was one, when indiscriminate condemnation of business 
methods and business ambition can be effective. The 
moralist who tries to show that money-getting is a mean 
thing overshoots the mark. His own acts, in his daily 
life, are usually enough to convict him of inconsistency. 
The economist, on the other hand, in pointing out the 
reasons why modern business methods are approved by 
society, puts himself in a position to condemn those 



INTELLECT VERSUS EMOTION. 1 7 

methods when they are carried to a point where they 
cease to be of social service, and violate instead of fur- 
thering the purposes which have justified their existence. 

§ 20. Individualism is not a creed or a platform, but 
a way of looking at things ; and the same may be said of 
socialism. The difference between individualists and 
socialists is largely a matter of temperament. It comes 
from a difference in constitution which leads the individu- 
alist to calculate the large and remote consequences of 
any measure and ignore the immediate details, while the 
socialist feels the immediate details so strongly that he 
distrusts the somewhat abstract lines of thought which the 
individualist is prone to follow. There is always some 
danger that the individualist will undervalue the emo- 
tional element in dealing with economic matters. Men 
of the more purely intellectual type are liable to mistakes 
of this sort. Reasoning about human conduct is full of 
chances of error ; and if the outcome of such reasoning is. 
to leave a considerable number of human beings in hope- 
less misery, the socialist is justified in demanding that 
every premise and every inference in the chain of reason- 
ing be tested, and every rational experiment be made tO' 
see whether such a consequence is really inevitable. In- 
stances have not been wanting where the conclusions of 
the economists have proved wrong, and the emotions of 
the critics have been warranted by the event. The fac- 
tory legislation of England furnishes an historic example. 
The economists, as a rule, condemned this legislation as 
wrong in principle and likely to do harm ; but the results 
showed that these economists had overlooked certain 
factors of importance with regard to public health and 
public morals which vitiated their conclusions and justi- 
fied public opinion in disregarding them. 

But while the men of emotion may sometimes be right 
and the men of reason wrong, the chances in matters of 
legislation are most decidedly the other way. It is safe 



1 8 PUBLIC AND PRIVATE WEALTH. 

to say that the harm which has been done by laws based 
on unemotional reasoning is but a drop in the bucket 
compared with that which has been done by laws based 
on unreasoning emotion. The tendency to overvalue 
feeling as compared with reason is a far greater practi- 
cal danger than the tendency to undervalue it. For 
legislation is essentially a matter of remote consequences. 
The man who tries to reason out these consequences will 
occasionally make mistakes ; the man who refuses to reason 
them out will habitually do so. The good which state 
interference does is often something visible and tangible. 
The evil which it does is much more indirect, and can 
only be appreciated by careful study. The man who has 
his mind so fixed on some immediate object as to shut his 
eyes to the results of such study, is almost certain to 
advocate too much state action. He may succeed in 
passing a few good laws, but he will be responsible for a 
vastly larger number of bad ones.^ 

§21. But how are we to determine what constitutes the 
general good of society, or to decide, in doubtful cases, 
whether a law is to be regarded as good or bad ? What is 
to be our standard of public wealth ? Shall we judge it 
by some preconceived ethical code ? This begs the whole 
question, for every race and every generation has a dif- 
ferent ethical code of its own ; and the very point we 
have to decide is, which of these several standards is the 
best. Or shall we judge a law by its effect on the happi- 
ness of the human race as a whole ? The difificulty of 
measuring happiness of groups of men renders this 
standard wholly unpractical except in a very limited 
range of cases. Or shall we try to discover in which 
direction human evolution is tending, and call a thing 
good or bad according as it perpetuates itself by conform- 
ing to this tendency or destroys itself by resisting it ? 
This is the standard which Hegel, Comte, and Darwin, 
' Herbert Spencer, "The Man versus The State," 1884. 



THE STRUGGLE FOR EXISTENCE. I9 

each in their several ways, have gradually taught the 
modern world to apply and accept. 

The modern observer sees in human histor}', no less 
than in natural histor}', the record of a process of elimina- 
tion and survival. He sees that laws and institutions no 
less than genera and species are the result of natural 
selection instead of being ordained by Providence for all 
time. He sees that the explanation, not to say the justi- 
fication, of national customs and feelings must be sought 
in the historical reasons for their survival. The modern 
world is coming to look at history' as a record of a struggle 
between different ideas and different institutions, whose 
issue is chiefly decided by the moral qualities of the con- 
testing races and has its chief importance in determining 
the moral standards of those races in the immediate 
future. 

§ 22. The struggle for existence among men is probably 
quite as severe as that among the lower forms of organic 
life. Among men as among animals or plants, we find a 
number of young brought into being which is far in ex- 
cess of the number that reaches maturity. We have a 
constant process of elimination of the weak and selection 
of the strong ; a process by whose workings we may ex- 
plain the formation of different types of man, as we have 
learned to explain the origin of species in plants or 
animals. In some respects the application of the doctrine 
of natural selection to human history is easier and clearer 
than its application to biology. In biology, no satisfac- 
tory explanation has been given of the preservation of ac- 
quired characteristics. Whether we hold with Darwin that 
they are transmitted by heredity, or with Weissmann that 
they are not thus transmitted, our reasoning is in either 
case beset with difficulties. But the student of human 
history is troubled with no such dilemma. Imitation and 
education will account for the perpetuation among the 
children of the useful qualities which their fathers have 



20 PUBLIC AND PRIVATE WEALTH. 

developed, and for the quick suppression of some qualities 
which have proved disastrous, without the necessity of 
calling in the aid of any doubtful theory of heredity. 

§ 23. But while the intensity of the struggle is the 
same, the conditions under which it is waged are different 
in certain important respects. In the first place, the 
human struggle for existence is between groups more 
than between individuals. In the second place, it is a 
struggle for domination more than for annihilation, — a 
struggle which has in it the possibility of losing part of its 
character as a strife and giving place to an arrangement 
for mutual service between those whose interests at first 
seemed to conflict. Neither of these things is wholly 
confined to the human race. All the higher animals 
make some sort of arrangements for the protection of 
their young until they reach years of maturity. They 
have some measure of family life, in which one or both 
parents will readily sacrifice themselves for the preserva- 
tion of their offspring ; so that the struggle is to a certain 
extent for the preservation of families rather than of 
individuals. In a great many cases larger groups of 
animals band themselves together for mutual defence and 
support, so that, within the limits of the group or herd, 
cooperation takes the place of conflict. In a few cases, 
especially among the higher forms of articulate life {e. g. 
ants), we even find domination substituted for annihilation 
as the result of the struggle between races. The race of 
ants which has proved stronger in the fight no longer 
regards the members of the weaker race as rivals to be 
killed, but as helpers to be utilized in labor for which the 
fighting race is unfitted. Under such circumstances we 
find institutions and usages which are in many respects 
strikingly like those of semi-civilized man. 

§ 24. What really distinguishes the evolution of human 
habits and institutions from those of the beaver or the ant 
is that their progress and differentiation are not accom- 



E VOL U TION IN HUM A N SOCIE TV. 21 

panied by changes of corresponding importance in the 
physical structure of the members of the race. The fight- 
ing ant is of a different species from the working ant. All 
its physical characteristics are different. They cannot 
have a common offspring. But the fighting man and his 
slaves belong to the same species. Their races can and do 
mix. Their physical characteristics are strikingly alike. 
The development of distinctive habits and usages among 
the lower animals is coincident with, and probably in- 
cidental to, obvious changes of physical structure. But in 
man the variations of habit and usage are the conspicuous 
phenomena, while the variations of physical structure are, 
by comparison, neither permanent nor important. 
Among the lower types of organic life, instances where 
domination rather than annihilation is the outcome of the 
struggle for existence are marked by sharp structural 
distinctions between the groups involved ; distinctions 
which are even more conspicuously marked in groups 
which render mutual service without one-sided domina- 
tion. In the lower forms of life this is almost confined to 
organisms that stand wide apart — e.g., flowers and insects. 
But in the human race it is most fully developed among 
those who stand nearest together in their plane of 
civilization, and who in their physical characteristics 
would seem to be designed for rivals rather than helpers. 
§ 25. There may have been a time at the beginning of 
its existence when the human race lived in isolated fami- 
lies ; when its organization was like that of the lion rather 
than that of the wolf. The evidence on this subject is 
quite untrustworthy. But the earliest and lowest races 
of humanity about which we can safely generalize are 
conspicuously gregarious. The horde is the unit, and not 
the family. There seems to be no reason for modifying 
the old word of Aristotle, that man is a political animal, 
and that the man without a community is either less than 
man or more. 



22 PUBLIC AND PRIVATE WEALTH. 

When we have a struggle for existence between com- 
munities, we no longer find the stronger individuals pre- 
served at the expense of the weaker. It is the stronger 
form of organization which survives ; or perhaps we can 
better say that survival proves which of the forms of 
organization is the stronger. We have a natural selection 
of ethical types rather than physical ones. In fact the 
very strength of the bonds which hold the organization 
together may prevent the elimination of weaker individu- 
als and pave the way for physical degeneration of the race 
as a whole ; realizing Goethe's fear that the world would 
turn into a vast hospital where the best energies of the 
strong would be taxed to take care of the weak. 

§ 26. To avoid this danger, which becomes more immi- 
nent as civilization advances, every good organization 
provides for a certain amount of struggle within the group 
itself. Such a struggle between individuals is of im- 
portance, in order to prevent the group type from becom- 
ing so rigid, and its laws and customs so inflexible, as to 
render it unable to adapt itself to changed conditions. 
But these conflicts within the group are to be regarded 
as means for preserving the whole group and making it 
strong. Where an institution gives the best individuals 
the chance to set the pace for the whole community and 
force it up to their level, it affords to the race that 
enjoys it an advantage in the struggle for existence ; 
where it gives them the chance to exalt themselves by 
pushing down their fellows, it has an opposite effect. The 
individual conflict must be judged as good or bad accord- 
ing to its bearings on the outcome of the race conflict. If 
the individualist can show that freedom will really con- 
tribute to the success of a nation or community in its 
struggle for existence with rival nations or communities, 
no one is likely to dispute the advantages of freedom. 
If, however, the socialist can show that this freedom en- 
riches a few in the nation at the expense of the many, 



ECONOMICS AND ETHICS. 23 

and thus makes any increase in material wealth a source 
of weakness rather than of strength, his criticism and de- 
mand for change will be accepted. No economist of repu- 
tation at the present day would attempt to ignore the 
ethical aspects of an institution, as might have been done 
fifty years ago. Instead of asserting the complete inde- 
pendence of economics and ethics, the modern economist, 
whether individualist or socialist, would insist on the close 
connection between the two sciences. He would say that 
nothing could be economically beneficial which was ethi- 
cally bad, because such economic benefit could be only 
transitory. He would insist with equal force that nothing 
could be ethically good which was economically disastrous, 
because in this case also destruction must ensue with 
equal certainty. The economist must understand the 
ethical bearings of the results which he discusses ; the 
moralist must understand the economic consequences of 
the action which he advocates. 

§ 27. Now that the world has come to recognize the 
true position and importance of economic history, it is 
useless to try to divide the economists of today into de- ■ 
ductive and historical schools, according as they employ 
one method or the other. Every good economist now 
employs both methods by turns; being guided in his 
choice by the character of the problem he is investigat- 
ing. The old antithesis between deductive and historical 
schools is giving place to a distinction between static 
and dynamic problems. In a static problem we assume 
that the character and institutions of a people remain 
fixed while the relations between the individual members 
change. In a dynamic problem we take account of the 
progressive changes in national character which result 
from the altered conditions of individuals. If the econo- 
mist takes human nature and human society as he finds 
them in the most civilized communities, with all their 
habits and their motives, their institutions and their 



24 PUBLIC AND PRIVATE WEALTH. 

theories, and on the basis of this assumption inquires 
what will be the effect of any proposed line of action 
upon the production and distribution of wealth, and the 
general well-being of society, this is called the deductive 
method of investigation. It deduces consequences from 
a given set of social conditions ; it is the method chiefly 
used in dealing with static problems. But the economist 
may go one step farther back and inquire how these mo- 
tives and institutions have arisen ; how far they are them- 
selves capable of modification ; what causes at the present 
day may be contributing to modify them. This is called 
the historical method of inquiry, and is of special impor- 
tance in the study of dynamic problems. 

§ 28. Most of the every-day work of economists involves 
the deductive method rather than the historical. If we 
ask why the price of wheat is falling ; or why wages are 
high in a certain locality ; or what is the probable effect 
of a proposed tax law upon production and prices ; or how 
the various classes in the community are influenced by the 
use of silver as money ; — we take human nature as we find 
it, and consider how commercial motives operate in affect- 
ing demand and supply in various lines of industry. But 
in the more difficult questions which involve moral judg- 
ment, the historical method must be combined with the 
deductive. If we ask whether trades-unions are a good 
thing or a bad thing, it is not enough to consider their 
momentary effect on wages, prices, and demand for labor. 
We must study this carefully ; but we must also study 
something more. We must look at the educational effect 
of such organizations upon successive generations of 
workmen and capitalists. Have they, in actual history, 
been wisely or unwisely led ? Have they taught work- 
men to do better work or worse work than was obtained 
by free competition? Have they secured a more equita- 
ble distribution of wealth among the members of the com- 
munity ? Are they likely to mitigate or to intensify those 



HIS TO RICA L ME THOD OF INQ UIR V. 25 

conflicts between capital and labor which form such a 
source of social weakness in the present economic system ? 
All these questions must be answered, and the probable 
gains and losses carefully balanced, before we are in a 
position to pass judgment on the question in its most 
fundamental aspect. In a broad problem of this kind, de- 
ductive economics and deductive ethics are equally help- 
less. The two sciences must be studied historically in 
connection with one another. 



CHAPTER 11. 

ECONOMIC RESPONSIBILITY. 

Slavery — Property — Emancipation — The Persistence of Poverty — The 
Malthusian Theory — Poor Relief — Compulsory Insurance. 

For a fuller account of the sociological basis of economics the reader is 
referred to F. H. Giddings, " Principles of Sociology," New York, 1896. 
A. Wagner, " Grundlegung " (vol. i. of liis " Lehrbuch der Politischen Oeko- 
nomie "), 3d ed., Leipzig, 1893 ; and A. Loria, " Les Bases Economiques de 
la Constitution Sociale," Paris, 1893, may be read with advantage. The lat- 
ter deals with economic history from a distinctly socialistic standpoint. 

J. Bonar : " Malthus and his Work," London, 1885. 

H. Fawcett : " Pauperism," London, 1871. 

G. Drage : "The Unemployed," London, 1894; "The Aged Poor," 
London, 1895. 

§ 29. Primitive man seems to have lived in much the 
same way as did the animals about him. He obtained 
his food by hunting, by fishing, or by consuming such vege- 
table products as lay ready to his hand ; in other words, 
by the destruction of the lower forms of organic life. But 
as civilization began to develop, he learned to utilize 
animals and plants instead of destroying them. Instead 
of killing all the animals which he captured in the chase, 
he found that they could serve him more usefully by be- 
ing domesticated. Some, like the dog or the horse, could 
assist him in hunting and increase the certainty of spoils. 
Some, like the goat or the cow, could give him a steady 
supply of milk. Some, like the sheep, could be made to 
multiply their numbers, and give an assured source of 

26 



DESTKUCTION OR DOMINATION. 2/ 

warmth in time of cold and a reserve of food when hunt- 
ing or fishing proved unproductive. A little later he 
learned to utilize plants as well as animals. Instead of 
eating all the fruit which he found, semi-civilized man 
saved a part for seed, and had more to eat during the 
coming year. Instead of destroying the means of food 
supply that nature furnished, he took care to replace them 
in increasing numbers. Instead of seeking income only, 
he began to accumulate capital.' 

§ 30. This change in his attitude toward the lower 
forms of life paved the way for a change in his attitude 
toward his fellow-men. When a tribe of men lived by 
hunting, it looked upon the members of other tribes as 
rivals, to be killed, if not eaten. So late as Roman times 
a stranger {Jiostis) was synonymous with an enemy. 
Where the available food supply was small, every addi- 
tional mouth was a positive evil. As a consequence the 
wars between different tribes were wars of extermination. 
Prisoners could not be taken ; for the only way in which 
they could support themselves was by hunting, and if 
they were given weapons to hunt with, they might use 
them to the destruction of their conquerors. In a state 
of society like this female captives were occasionally 
spared ; male captives almost never, unless for some very 
exceptional reasons the conquerors were prepared to adopt 
the captive as a member of their own tribe. 

But when the domestication of animals and the cultiva- 
tion of plants came into use, the case was altered. The 
captives could be employed to perform labor which was 
disagreeable to their conquerors. This labor required no 
weapons and did not render the slaves dangerous ; though 
we find some tribes where captives were habitually blinded 
as a precaution against insurrection, as in Herodotus' 
description of the Scythians. The more the arts ad- 
vanced, the greater was the opportunity to utilize such 

' In the public sense — not as yet in the private sense. 



2S ECONOMIC RESPONSIBILITY. 

unwarlike labor and the larger was the proportion of 
captives whose lives were spared. 

Such was the origin of slavery. As compared with the 
conditions that preceded it, it represented a positive 
gain for humanity. From the standpoint of the captive, 
it was better to be spared even for a life of hard labor 
than to be put to death without mercy. From the stand- 
point of the conqueror, it was an intellectual and moral 
advance to forego the cruel delight of torturing enemies 
for the sake of the future advantages to be obtained from 
mastery over their persons and powers. From the stand- 
point of the community as a whole, it was an immeasurable 
gain to have labor exercised continuously for a remote 
end, even though it was bestowed grudgingly and under 
compulsion. 

§ 31. Those who look at the virtues of free communi- 
ties, and the vices which develop in connection with the 
system of slavery, are often tempted to regard its intro- 
duction as a degradation of society. Even if they admit 
that the new system enables a great many people to live 
who would otherwise have been put to death, they think 
that this is accompanied by a lowering of the average 
moral standard of the community. There is much super- 
ficial reason for this view. Where all men were free, and 
all skilled in the use of arms, there was universal self- 
reliance and self-respect. Where each man by the same 
token was able to protect the honor of his daughter, sister, 
or wife, there was frequently a high degree of respect for 
women. But these merits were outweighed by an in- 
security which rendered progress impossible. So much 
of the strength of the community had to be spent ia 
fighting, that there was little opportunity for present 
comfort and no chance to lay the foundation for future 
improvement. The rose-colored view of the life of free 
communities which people held a few years ago is no 
longer universally accepted. Great as were the disadvan- 



SLAVE LABOR. 



29 



tages attending it, there is reason to believe that the con- 
dition of serfdom gave to the majority of the people who 
lived under it a positive advance in present enjoyment 
and in possibility of increased future enjoyment. The 
mediaeval villein who had to give half his time to the ser- 
vice of a feudal lord was better off, materially at any rate, 
than a man who, though nominally free, had to spend half 
of his working time in self-protection, and who even on 
those terms could not protect his family from outrage, 
nor the results of his labor from arson and pillage.* 

§ 32. But while slave labor marked an advance over the 
conditions which had preceded it, it was far from being a 
good system according to modern standards. It was 
better than no labor at all. This was about all that could 
be said in its favor. If people would not work except on 
compulsion, it was a good thing for society to have that 
compulsion exercised. But the result was at best un- 
satisfactory. The slave tended to keep his product at a 
minimum. He was compelled by the overseer to do a 
certain amount ; he had no inducement to do more than 
that amount. He had reason to believe that his master 
would be forced by self-interest to allow the slave enough 
to keep him alive ; he was still surer that the master would 
not allow him more than this. Any extra exertion or care 
redounded to the profit of the master, not of the slave. 
The inevitable result was low efficiency and great waste. 
The more complicated the work to be done, the less was 
the chance of avoiding these evils. A slave-driver could 
compel those who were subjected to his rule to perform a 
certain amount of physical labor: but he could not com- 
pel them to exercise intelligence or zeal. These were only 
to be secured when the hope of reward came in to supple- 
ment or take the place of the fear of punishiiient. When 

' Modern historical criticism has cast doubt on the idea, so universally held 
a short time ago, that the development of feudalism supplanted a system of 
free and prosperous village communities. 



30 ECONOMIC RESPONSIBILITY. 

the habit of labor and the capacity for labor were suffi- 
ciently developed in a race of men, the institution of 
property furnished a far more potent means of getting 
work done for society than did the institution of slavery. 
While it allowed the shiftless men to do a little less, it 
encouraged the prudent and ambitious to do a great deal 
more. 

§ 33. It must not be supposed that property rights 
originated in considerations of this kind. Though -the 
institution of property is a most important motive to the 
zealous and intelligent application of labor, it was not de- 
vised for this purpose. The earliest property rights were 
based on occupancy rather than on labor. They were a 
recognition of the power of the strong man to retain what 
he had seized, not of the right of the industrious man to 
enjoy what he had produced. We may fairly grant the 
claim of the socialist that capital originated in robbery. 
In like manner, labor originated in slavery. Neither fact 
has any appreciable bearing on present issues. Neither 
fact tends in the least to prove either that the capitalist 
is a thief or the laborer an inferior. 

§ 34. At first, property seemed indistinguishable from 
possession. The so-called property-rights of uncivilized 
tribes are for the most part customs regulating the claims 
conferred by possession, rather than guarantees of per- 
manent ownership. True property right is something 
quite distinct from the fact of possession or from the 
claims which such possession gives the occupant. It in- 
volves a recognition on the part of the community that 
some individual or group of individuals has permanent 
authority over certain objects, whether he is actually 
using them or not. In the hunting stage of society there 
was very little property right, because most of the useful 
objects took the form of food for immediate consumption 
or clothing and weapons for continuous use. In any of 
these cases the fact of possession was the important matter 



ORIGIN OF PROPERTY RIGHTS. 3 1 

and established a right of use. A man was left in posses- 
sion of the things which he himself made, used, and con- 
sumed. But the same progress in the arts which gave 
the chance for labor and paved the way for slavery, gave 
rise to questions of ownership and to a more complex 
system of property rights. Whenever there was an alter- 
native between domination and destruction, as in taming 
an animal instead of eating it, or in sparing a prisoner of 
war instead of killing him, it was necessary to strengthen 
the motives which should lead people to sacrifice obvious 
present enjoyment for the sake of large future advantage 
to the community. An animal was far more likely to be 
domesticated if the man who had captured it v/as allowed 
special and enduring rights to its use. The prisoner of 
war was far more likely to be spared by his captor if that 
captor was assured that the slave would be recognized as 
belonging permanently to him rather than to the com- 
munity as a whole. 

§ 35. Such ancient property rights are for the most part 
not well earned, according to modern standards. They 
are due to force more than to labor. The men who enjoyed 
the most property were, as a rule, the successful fighters 
rather than the industrious workers. But such a system 
of property, in spite of its apparent violations of justice, 
has served an important purpose. It marks the beginning 
of a higher civilization. It enables the races that have 
lived under it to reach a higher stage of material and 
moral development than their rivals who have had no 
such system. 

In the first place, it tends to the preservation of useful 
things. It causes domination to take the place of extinc- 
tion as a habit in peace and a purpose in war.^ It gives 
the race a larger amount of accumulated wealth of every 
sort ; and this wealth, though primarily enjoyed by a few 

^ Compare O. Effertz, " Katechismus der Politischen Oekonomik," Bonn, 
1893. Lieferung III. 



32 ECONOMIC RESPONSIBILITY. 

who have perhaps done least to merit it, nevertheless con- 
tributes to the strength and security of the whole people 
and their possibilities of enjoyment in the future. Insecu- 
rity of tenure makes wealth likely to be destroyed. It 
was noticed in the American Civil War that when a regi- 
ment was ordered to leave a camping ground which it had 
gradually made comfortable, a fire was almost certain to 
arise which would consume all the non-portable improve- 
ments. 

§ 36. In the second place, property right, even when 
based upon force, creates a class of men more or less 
removed from the immediate pressure of poverty. The 
man who holds accumulated wealth can use it for the per- 
manent advantage of himself and his children, and enable 
them to develop physically and mentally in the face of 
industrial vicissitudes which would otherwise bring the 
whole community to the verge of starvation. Property 
of this kind is accumulated not for the individual alone, 
but for his family. Its development is associated with 
the development of modern family life. It paves the way 
for a progressive advance of the members of a family from 
generation to generation. By exempting the children of 
the fortunate few from the burdens of want which, if 
equally shared, would drag the whole race down, it 
allows them to advance and to pave the way for a similar 
advance on the part of others. The desire to make pro- 
vision for one's children is not merely a potent motive for 
the preservation of property, but a powerful means for 
giving free room to the process of natural selection of the 
types most fit for permanent strength and survival. 

§ 37. In the third place, such accumulations of prop- 
erty, combined as they are with family life and family 
feeling, create a conservative class in the community 
which stands on the side of law rather than of violence, of 
construction rather than of destruction. If a strong man 
has no property, he has everything to gain and nothing 



EXTENSION OF PROPERTY RIGHTS. 33 

to lose by the constant prevalence of petty warfare. If, 
however, he has useful rights which he wishes society to 
recognize, and, above all, if he desires a permanent recog- 
nition of those rights for his children as well as for him- 
self, his powers are enlisted on the side of tranquillity and 
permanence rather than on that of war and change. He 
is interested in giving increased power to law and to the 
sentiment of respect for law ; a process which, as it is car- 
ried toward its completion, must work for the benefit of 
the weak quite as much as for that of the strong. Even 
if his property right was originally based upon acts of 
violence, he is led to discourage the continuance of this 
method of acquisition among his immediate neighbors, 
and to make usage, rather than force, the basis on which 
society is to recognize rights of possession. 

§ 38. If this point has been reached, and the strong 
man appeals to customary rights among his neighbors, it 
is but a short step to the recognition of such customary 
rights among his slaves. Whether a nation takes this, 
step or not depends very largely upon its foreign relations. 
If these are such that the supply of slaves from abroad 
continues rapid and steady, the acknowledgment that 
slaves have rights makes little progress. The old slaves, 
are worked to death, new ones take their place, and there 
is no room for the creation of a traditional status which 
slave laborers may inherit from generation to generation. 
Even among the most civilized nations of antiquity the 
progress of emancipation was slow as long as wars of con- 
quest were matters of every-day occurrence. The Romans 
created a system of property right which enabled them to 
accumulate wealth, to develop an aristocratic class, and to 
secure the highest degree of law and order within the 
Roman dominions ; but it was a long time before the 
slaves obtained much benefit from this process, because 
slave labor from abroad was so readily obtained by con- 
quest. In mediaeval Europe, on the other hand, while 



34 ECONOMIC RESPONSIBILITY. 

there was much less accumulation of wealth and much 
less respect for law, there was far more rapid recognition 
of civil rights on the part of the laborers who were actu- 
ally engaged in the production of wealth. It is true 
that these rights were by no means accurately defined. 
Serfs could be sold into foreign parts, and different mem- 
bers of families separated from one another by such 
sale, to a far greater degree than is generally supposed. ' 
But a custom grew up and grew stronger from generation 
to generation, rendering such infringements of personal 
liberty more and more rare as time went on. In mediaeval 
serfdom, as we generally see it in western Europe from 
the twelfth to the fifteenth century, the villein was bound 
to labor for his lord a certain number of days, and on 
other days was allowed to work for himself or for his own 
community on certain lands set apart for that purpose. 
He had thus attained, by custom rather than by law, a 
certain measure of freedom and a status in the community 
which placed his position far above that of the Roman 
slave. 

§ 39. Where such customary rights have been once 
established and no new sources of supply of slave labor 
are opened, the necessity of stimulating production causes 
the workmen to be given proprietary rights in the pro- 
duct of their labor. This is at first most conspicuous in 
manufacturing industries. A few skilled workmen collect 
in a town where they can defend themselves against mili- 
tary aggression, and then produce goods so far superior 
in quantity and quality to the product of their enslaved 
competitors that the feudal lord soon comes to purchase 
goods from the town instead of relying on the few rude 
articles which can be made on his own domain. The 
towns thus become a centre of free trade and free labor. 

§ 40. The same course of events works itself out in 

^D'Avenel: " Histoire Economique de la Propriete," Paris, 1894, pp. 
162/-. 



EMANCIPATION. 35 

agriculture, though as a rule more gradually. The free- 
man working for himself can produce so much more than 
the serf that there is a chance for both parties, lord and 
vassal, to gain by the process of emancipation. If the 
amount which a man produces in a day when he works 
for his landlord is worth a halfpenny, and the amount 
which he produces when he works for himself is worth 
one and a half pence, it is for the advantage of both the 
landlord and the laborer to make a contract whereby the 
laborer agrees to pay the landlord a penny in lieu of each 
day's labor previously rendered. Such a contract is also 
advantageous to the public wealth of the community as a 
whole, by causing increased food supply and consequent 
increase either of numbers or of strength. The more in- 
teUigent and ambitious the laborer, the greater will be 
the difference between his minimum product which he 
creates as a serf and his maximum product which he can 
create as a freeman ; the greater, therefore, will be the 
possible advantages to all parties from emancipation. 
Hence we find that the passage from slavery to freedom 
came earliest and worked itself out most completely in 
those countries where the general ability of the villein 
class was greatest. In England, between the twelfth and 
the fourteenth century, there was a rapid change in the 
position of the cultivators of the soil, whereby money 
rents of small amount were substituted for compulsory 
labor.^ On the continent of Europe the change did not 
take place so soon, nor was it so complete when it came. 
Instead of agreeing to pay a certain amount of money, 
as was generally the case in England, the continental 
peasants usually contracted to pay a certain share of the 
product to the owner of the soil. They thus gained a 
part of the benefit of their industry and ambition, instead 
of the whole. This system of share rents, whereby the 
cultivator gives the proprietor a percentage of the pro- 

* W. J. Ashley : " English Economic History," chap. i. 



36 ECONOMIC RESPONSIBILITY. 

duct, is known as the metayer system. Even this degree 
of independence was not attained by most of the peas- 
antry in central Europe until the close of the last century, 
while in Russia the system of serfdom lasted with but 
slight modifications until 1863. 

§ 41. It must not be supposed that this change from 
slavery to free labor was voluntarily suggested, or even 
readily accepted, by the feudal lords. It was forced upon 
them by the conditions of the struggle for existence be- 
tween different races and different members of the same 
race. As Europe was constituted in the Middle Ages, 
the land was by no means well utilized. Scarcely any 
district produced anything like the amount of food and 
other supplies which would have been possible under a 
better system of government. As long as warfare was 
carried on with rude appliances, this lack of good agricul- 
ture, however injurious to the comfort of the mass of the 
people, did not seriously cripple the fighting power of the 
privileged classes. But with the improvements in military 
art, which rendered capital necessary for the successful 
waging of war, it was impossible for a man to fight to ad- 
vantage unless his vassals worked to advantage. Where 
every man was ready to fight on short notice and armies 
could be supported by plundering the peaceful inhabi- 
tants of the country through which they travelled, whether 
friend or foe, the necessity of large supplies was not 
clearly manifest. But when war was waged on such a 
scale that a campaign involved weeks of preparation and 
days of occupancy of the same ground, victory was apt 
to rest with the man who had the best commissary 
service. Under these circumstances, the race that could 
feed and clothe its army on the largest scale had an 
enormous advantage in the conflict, and one which gener- 
ally proved decisive. It was for this reason quite as much 
as for any other that we find kings so often taking the 
side of free labor. It was not because they loved serfs 



SUPERIORITY OF FREE LABOR. 37 

and hated nobles, but because, warring on a large scale, 
they were compelled to maintain large armies and to give 
their acquiescence to the system by which such armies 
could best be fed. 

§ 42. The force of these considerations is illustrated by 
the history of emancipation in Russia and in the United 
States. To the Russian government, the Crimean war 
had proved that a country living under the old industrial 
order, however large her population and her army, could 
not even on her own ground cope successfully with coun- 
tries which enjoyed modern industrial methods. Emanci- 
pation thus became a military necessity. In the United 
States this necessity was even more strikingly emphasized, 
because the contending parties were of the same race and 
on the same general level of civilization, differing only in 
the fact that the North relied on free labor and the South 
on slave labor. The contest was decided, not by the 
direct result of military operations — for if we look at bat- 
tles alone the victories of the South were more conspicu- 
ous than those of the North — but by the fact that the 
North was able to maintain her supplies of every neces- 
sary article almost unimpaired by the stress of war, while 
the South was brought low by continually increasing ex- 
haustion. The war was not decided by disparity of num- 
bers between the two sections ; for this disparity was 
nearly counterbalanced by the advantage which the South 
had in acting on the defensive. It was the disparity of 
industrial systems which decided the issue of the contest. 

§ 43. It must not be assumed that emancipation is a 
good thing for every man or for every race. Compulsory 
labor is better than no labor at all. If people are not 
ready to work for fear of starvation tomorrow, they must 
be forced to work by physical compulsion today. If they 
are not accessible to motives of ambition, there is danger 
that the loss by the introduction of free labor will out- 
weigh the gain. Where a body of serfs contributes in 



38 ECONOMIC RESPONSIBILITY. 

large measure to the working out of its own emancipation, 
there is not much danger of this result. The struggles 
necessary to obtain freedom form the best preparation for 
freedom and the best guarantee that it will be wisely 
used. But where emancipation is imposed from above by 
outside power, whether from motives of humanity or of 
self-interest, there is great danger that, for the time being 
at least, the losses will outweigh the gains. The emanci- 
pation of the slaves in South American countries has not 
always contributed to the commercial prosperity of the 
countries which set them free or to their general standard 
of morality and efificiency. Even in the United States it 
seemed for many years questionable whether the good 
resulting from the abolition of slavery would outweigh 
the evil. A population which had never worked except 
under immediate compulsion was suddenly given the 
highest degree of freedom. To a considerable part of 
the negro race this freedom meant liberty to desert their 
families and to violate all contracts for continuous work. 
For many years the free labor of the South was too 
uncertain to be available for industries requiring unin- 
terrupted toil. Iron manufactures failed in regions con- 
spicuously well adapted for iron production, because no 
laborers could be found to keep a furnace in blast if a 
circus unexpectedly appeared in the next county. They 
were ready to sacrifice all prospects of future employment 
for the sake of the day's gratification. Of late this state 
of things has changed for the better. The increasing de- 
velopment of business ability among the leading men of 
the South, coupled with the adaptability and docility of 
most of the negroes, has at length enabled the country 
to secure the advantages of free labor. In spite of many 
perplexing problems connected with increase of negro 
population, the worst difficulties of emancipation have 
been evidently surmounted. 

§ 44. In Russia the result is not nearly so good. 



LOCALIZATION OF POVERTY. 39 

Though the Russian peasant was a Httle more self-reHant 
than the negro slave, he was by no means so adaptable to 
new conditions. Nor were the Russian nobility fitted, 
either by power or by inclination, to take the lead in 
teaching the peasantry good business habits. Under 
such circumstances, the condition of the Russian free 
peasant today seems to be Avorse than that of the serf a 
generation ago. He has diminished instead of increasing 
his productiveness. He has fallen under the control of 
the money-lender, who proves quite as hard a master as 
the old noble. Not having been mentally qualified at the 
start to avail himself of the advantages which emanci- 
pation offered, he has gradually sunk into a position 
where those advantages are out of his reach, no matter 
how great the industry or the ambition which he might 
show. People differ as to the remedy ; but there is a 
general consensus of opinion among all who are versed in 
Russian affairs that the state of things as it exists at pres- 
ent is a most unsatisfactory one, and that emancipation 
has failed to accomplish the good which was expected. 

§ 45. The gradual progress of emancipation widens 
the circle of those who can free themselves from the im- 
minent danger of poverty. Instead of being confined to 
the military chieftain, a fair degree of comfort comes 
within the reach of a large number of men of industry and 
ability. Under the system of slavery, the worker had no 
inducement to increase his output or to diminish his con- 
sumption. Under the system of free labor, each increase 
in the amount that he produces and each diminution in 
the amount that he consumes goes to make up a fund 
which will ensure him and his children against danger of 
starvation. Under these circumstances there is a force 
constantly at work to build up a race of industrious and 
prudent men. Poverty is by no means abolished, but it 
is localized. The ancient world was constantly in dread 
of famines which swept away large sections of the com- 



40 ECONOMIC RESPONSIBILITY. 

munity and diminished the strength of those that sur- 
vived. Today we no longer regard such universal misery 
as a probable incident of economic life. When there is 
an approximation to such a condition, as in the potato 
famine in Ireland in 1846, or in the occasional years of 
great distress in the Russian Empire, it is due to excep- 
tional causes which have prevented the laborer from 
realizing the benefits of freedom. In the most advanced 
communities, extreme poverty is very apt to be associated 
with gambling, drinking, or general shiftlessness. The un- 
fortunate but deserving poor, though still far too numer- 
ous, are the exception rather than the rule. 

§ 46. While it is true that poverty persists in the 
midst of advancing wealth, it is not true that it increases, 
as so many people are led to suppose. Judged by the 
best criteria which we can apply, poverty as a whole is 
diminishing rather than increasing. Both the absolute 
standard of comfort attained by the average laborer, and 
the share of national income which goes to labor, seem 
to be better now than in any period for which we have 
adequate data for comparison. ' Perhaps the chief reason 
why the evils of poverty are so emphasized in modern 
times is to be sought in the very progress which has local- 
ized poverty. As long as danger of starvation was re- 
garded as the common lot of mankind, from which only a 
favored few were exempt, it seemed as idle to complain 
of poverty as it was to complain of heat or cold. But 
when most people were relieved from a pressure which 
was formerly wellnigh universal, the lot of those who re- 
mained under the yoke excited commiseration as some- 
thing exceptional. As theories of political and social 

' This subject is further developed in subsequent chapters. See also Rae : 
" Contemporary Socialism," chapter on "Socialism and the Social Ques- 
tion." Atkinson : '* The Distribution of Products," Part i. Reasonings on 
either side of this question based on uncritical use of census figures are quite 
worthless. 



THE MALTHUSIAN THEORY. 4 1 

equality make progress, the industrial inequality between 
richer and poorer members of a community is felt to be a 
grievance. Even by some of those who grant that the sys- 
tem of free labor has tended to diminish the number of 
the poor, the fact that any people whatever remain poor 
and out of work is made an indictment against it. It is 
felt by many that our theories of political equality and 
our sense of moral duty are violated if any man who is 
willing to work cannot obtain the chance to exercise his 
powers and obtain a living wage by so doing. Admitting, 
as they must, that much of the poverty is due to causes 
for which the poor themselves are to blame, they do not 
feel that society has done its duty as long as any man 
who is willing to work is deprived of the opportunity. 

§ 47. This view was subjected to sharp criticism by 
Malthus at the close of the last century.' He made a sys- 
tematic attempt to prove that society could not under- 
take to provide work for all who might desire it, and that 
poverty was a necessary incident of the struggle for ex- 
istence rather than an indictment against modern society. 
It is of the utmost importance to determine the truth or 
error of the Malthusian theory. According as we accept 
or reject it we change our mental attitude toward a large 
number of schemes of social reform. If poverty is inevi- 
table and simply represents a sacrifice of individuals for 
the sake of the progress of the race, we may and must 
view with resignation a number of evils which can only be 
made worse by attempting to eradicate them. If, on the 
other hand, it is in large measure a preventable thing, then 
the claims of our present civilization to favorable judg- 
ment, in the matter of either material or moral prosperity, 
can hardly stand for a moment. 

§ 48. The Malthusian theory, in brief, is that popula- 
tion has a tendency to multiply faster than subsistence, 
and that, under such circumstances, some people will neces- 
' "Essay on the Principle of Population," 1798. 



42 ECONOMIC RESPONSIBILITY. 

sarily fail to have the food they need ; that poverty is 
therefore inevitable unless the race as a whole adopts pre- 
ventive means to restrict the increase of its numbers. In 

* 

the absence of such preventive checks to population, the 
Malthusian holds that poverty is unavoidable, and that 
the numbers of the race will be kept down by vice and 
misery. 

§ 49. In order to understand the chain of proof by 
which this theory is supported,' let us look at the rela- 
tions between the birth and death rates and the prosperity 
of the community as a whole. By the birth rate, as it is 
ordinarily expressed in statistics, we mean the number of 
births per thousand inhabitants per year. If in a city of 
100,000 inhabitants the records show 300 births in a 
month, we say that this represents a birth rate of 36, be- 
cause the same number continued through the twelve 
months would make 3,600 in a year for the whole city of 
100,000, or 36 per thousand. The physiological possibili- 
ties of the birth rate in the human race, when not restrained 
by intellectual, social, or moral considerations, are thought 
to be as high as 60 per thousand, though no statistics 
show a birth rate as large as this over any considerable 
extent of space or time. 

The death rate is computed and expressed in the same 
manner as the birth rate. For instance, if the number of 
deaths in the same city during a month was 200, it repre- 
sents a death rate of 24. 

The lowness of the death rate is an index of social 
prosperity. If the death rate is high it means that there 
is a large amount of disease and waste and a short aver- 
age duration of human life. If, on the other hand, the 
death rate is low, it means that the average duration of 
human life is long, disease relatively infrequent, and 

^ The line of argument which follows differs in some respects from that 
adopted by Malthus. It represents the modern proof of the theory rather 
than the one originally advanced. 



BIRTH RATE AND FOOD SUPPLY. 43 

working power well utilized. A death rate of 20 per 
thousand means an average duration of life of 50 years. 
A death rate of 40 per thousand means an average dura- 
tion of only 25 years, with all the misery which such a 
state of things connotes. 

§ 50. The difference between the birth rate and the 
death rate in any one year represents the rate of increase 
of population for that year. If the birth rate is 45 per 
thousand, and the death rate 25 per thousand, the in- 
crease of population is 20 per thousand, or two per cent. 
Such an increase in any given area means a corresponding 
increase of the density of population. As long as this 
increase is accompanied by corresponding improvements 
in the arts of producing and utilizing food, it has no ad- 
verse effect ; but when the increase of numbers is more 
rapid than this, it involves difificulty in obtaining enough 
for people to eat. For it is a fact thoroughly estab- 
lished by observation, that in any given stage of the arts 
there is a certain point beyond which increased applica- 
tion of labor and capital does not obtain correspondingly 
increased supplies of food from a given area. A territory 
which can support one million men in comfort cannot 
do the same for two million under the same conditions 
of cultivation. Either the two million must work very 
much harder to obtain their food supplies from the land, 
or they must content themselves with less food per capita. 
This great law of agricultural production is known as the 
law of the diminishing return. Up to a certain point in- 
creased amounts of labor and capital are accompanied by 
more than proportionate increase in the product ; but 
when this point is passed the additional returns diminish 
rapidly and not infrequently cease altogether. In order 
to live at all the laborers have to seek out new lands less 
advantageous than the old, or to content themselves with 
obtaining the necessary product from the old lands at an 
economic disadvantage. 



44 ECONOMIC RESPONSIBILITY. 

§ 51. Whenever a country has become so crowded that 
such a state of things as this is reahzed, the struggle for 
domination between individuals gives place to a struggle 
for extinction. Each man in striving to obtain enough to 
keep himself alive leaves less than enough for some other 
man. As society is at present organized this pressure 
will be felt most severely by those who have large families 
of children. The prudent man, who has not married until 
assured of his ability to support a family, has placed 
himself outside of the severest stress of this struggle. 
But his less prudent competitor, who earns no more and 
who has more mouths to feed, may find himself, and 
often does find himself, through no fault of his own ex- 
cept lack of foresight, in a position where he is unable 
to keep his children alive. Not that in civilized com- 
munities they often die of actual and direct starvation ; 
but that the lack of the food best adapted to their wants 
makes them succumb to disease where better-fed children 
would survive. 

§ 52. Under favorable circumstances this scarcity of 
food may be avoided by improvements in the arts, whether 
of agriculture, of domestic economy, or of good govern- 
ment. Whatever contributes to the better utilization of 
the products of the land for human support increases the 
number of people that can be maintained without the 
danger of starvation. This result is produced by any im- 
provement in agriculture which enables the land to fur- 
nish larger crops; or by better cooking, which enables 
more nourishment to be obtained out of the same crop. 
Improvements in clothing and shelter, which keep people 
warm, may take the place of food which was once needed 
to produce heat. Methods of government which cause a 
larger part of the land to be utilized for the support of the 
nation or diminish losses and waste from violence, may 
serve to prevent the pressure of overcrowding. But the 
physiological possibilities of the birth rate are so far in ex- 



EXCEPTIONAL CONDITIONS IN AMERICA. 45 

cess of any death-rate which is consonant with social pros- 
perity that the improvement in the art of food supply, 
direct or indirect, will not generally keep pace with this 
possible excess. Even if the pressure be momentarily 
relieved, the reduction of the death rate, which is a con- 
sequence of such relief and an index of prosperity, serves 
to hasten the time when the increase of population reaches 
the limit set by the possibilities of supporting it. 

§ 53. A fact like this may be obscured for a time in a 
country like the United States, where settlers with a high 
degree of civilization occupy land which is almost empty. 
Before such a country has filled up to the level permitted 
by modern civilization, increase of numbers will for a long 
time mean increased economic advantage, and the law of 
the diminishing return will drop out of sight. But the 
United States is doing, in little more than a century, 
what it has taken Europe several thousands of years to 
do. It is passing from a density of population limited by 
the arts of the hunting stage to one which is allowed by 
the modern arts of scientific agriculture. Such a state 
of things is necessarily exceptional, and must terminate 
in a comparatively short time.' 

§ 54. This pressure of population upon subsistence 
serves in no slight degree as a stimulus to improvement 
in the arts. It was this which forced hunting tribes to 
practice the domestication of animals. It was this which 
forced wandering pastoral tribes to settle down and apply 
themselves to the less exciting and agreeable arts of 
agriculture. It is this which has done much to accelerate 
the change from the military organization of society to 
the modern system of free labor. The attempt to provide 
for all children that might be born would, in the opinion 

' The criticism of Henry George ("Progress and Poverty," book ii.), 
which is perhaps to readers of the present generation the most familiar 
argument against the Malthusian theory, overlooks this exceptional character 
of American conditions. 



46 ECONOMIC RESPONSIBILITY. 

of the Malthusian, not only prove futile from the difficulty 
of finding food enough to go around, but it would also, 
first, take away the stimulus under which progress had 
been made ; second, put a stop to the natural selection of 
the stronger individuals and families and reduce the race 
to a dead level ; third, impair the capital of the com- 
munity through increased consumption and diminished 
production so much that it could not maintain the stage of 
civilization which it had reached, and that its progress must 
give place to retrogression. The Malthusian therefore 
argues that society cannot undertake to relieve its mem- 
bers from the pressure and from the evils of poverty un- 
less they will consent to adopt preventive checks to 
population. They must be prepared so far to reduce 
the birth rate that the excess of the actual birth rate 
over the admissible death rate will not outstrip the annual 
improvement in the arts of producing food. If we wish 
to reduce the death rate to 25 in the thousand and the in- 
crease in food supply from the area available is not likely 
to average more than one per cent, annually, the birth 
rate must be kept down to 35. The man who marries 
recklessly, so as to make the consumption of his family 
exceed its contribution to the annual product of the na- 
tion, is, in the opinion of the Malthusian, assuming the 
right to do something which must prove disastrous to the 
race if adopted generally. Against the attempt to burden 
society as a whole with the results of such imprudence 
the Malthusian protests emphatically. If the relief of a cer- 
tain section of the poorer classes results, not in the accumu- 
lation of property by those classes, but in the multiplication 
of the number of their children, society, by the re- 
lief which it furnishes, simply transfers its food supplies 
from the support of the children of the efficient and 
prudent to the support of the children of the shiftless 
and imprudent. Such a course must result in degen- 
eration. It is a condition of social progress that so- 



ARGUMENTS AGAINST MALTHUS, 47 

ciety must keep its increase of numbers within the limits 
set by improvement in the arts. In order to make such 
a general restriction of numbers possible, the respon- 
sibility for diminishing the numbers of his own family 
must be brought home to every man ; and if this respon- 
sibility is ignored, the blame for the condition of the family 
must be imputed, not to society as a whole, but to the 
man who has ignored a social necessity. 

§ 55. To this view the opponents of Malthus reply : 
I. There is almost never, in civilized society, a present 
or immediate pressure of population upon subsistence. 
There is always food enough to go around, if it were only 
better distributed. 2. If such a distribution were made, 
there is no likelihood of a future pressure of population 
upon subsistence, because increased comfort is accom- 
panied by a lower birth rate instead of a higher one. 

§ 56. These critics overlook the fact that this surplus of 
food in civilized countries is itself a consequence of that 
family responsibility on which the Malthusian lays so 
much stress. In uncivilized countries there is not ha- 
bitually any such surplus. It is a matter of very great 
doubt in each year whether there is going to be food 
enough to go around. Famine and weakness, resulting 
from too great numbers and too little food, constitute an 
ever-present danger to an uncivilized or half civilized 
tribe. The efforts to avoid this danger testify to its 
existence and its importance. Not a few races have ha- 
bitually resorted to infanticide as the only means of keep- 
ing the numbers of the tribe within the power of the 
land to support. Others, a step farther advanced, have 
tried to solve the question of population by leaving the 
matter to the women, — a system known as the matri- 
archate. Each of these methods lessened the burden of 
unproductive consumption, but neither of them fully met 
the necessities of the case. While they checked consump- 
tion and made accumulation possible, they did not provide 



48 ECONOMIC RESPONSIBILITY. 

security for such accumulations of capital nor means of 
natural selection of the strong ; still less did they afford 
the stimulus to production which the combination of pri- 
vate property and family life gives to the modern laborer 
in all but the very lowest classes. 

§ 57. Nor have we any reason to believe that increased 
comfort is necessarily accompanied by a lowering of the 
birth rate. It is true that as society exists at present, 
high comfort and low birth rate are commonly associated, 
because comfort is made to depend upon prudence. Let 
the comfort be made independent of prudence, as in the 
case of the pauper or criminal, and the birth rate tends to 
increase rather than diminish. It may not be exactly 
true, as some Malthusians would have us believe, that the 
low birth rate is the cause of the comfort, but it is much 
farther from the truth to assert that the comfort is the 
cause of the low birth rate. Both are the results of a 
common cause — the exercise of prudence, which gives 
high comfort and low birth rate to those who are capable 
of practicing it, while those who are incapable of so doing 
have at once a higher birth rate and a lower level of 
<:omfort.^ 

§ 58. This line of thought enables us to explain satis- 
factorily a phenomenon which has been misunderstood 
by many of the opponents of Malthus, namely, that the 
fear of starvation does not lower the birth rate so much 
as the fear of losing social standing. In the light of what 
has just been said, the reason for this is perfectly clear. It 
is not that social ambition in itself constitutes a greater 
preventive check to population than the need of sub- 
sistence; but that the need of subsistence is felt by all 
men alike, emotional as well as intellectual, while social 

' No amount of facts such as are accumulated by writers like Nitti will 
prove anything against the Malthusian theory. Statistics show that high 
comfort and low birth rate go hand in hand. They are absolutely incapable 
of showing which is cause and which is effect. 



ETHICAL SELECTION. 49 

ambition stamps the man or the race that possesses it as 
having reached the level of intellectual morality. I'Uhical 
selection can therefore o[)erate on the latter class as it 
does not on the former. The intellectual man has possi- 
bilities of self-restraint which the emotional man has not. 
Give the intellectual man the chance to reap the benefit of 
such self-restraint, and you will find reduced birth rate 
and increased comfort goinj^ hand in hand. 

There are some cases under the c:xistin^ social order 
where men who are capable of higher things multiply 
recklessly through .sheer hopelessness. With men like 
this, a better distribution of the results of labor would 
doubtless operate not only to increase their productive 
efficiency but to contribute to their prudence in marrying^ 
and thus to diminish the birth rate, l^ut this result would 
be accomplished by assimilating the condition of these 
men to the normal condition of property owners, and 
would be dependent on the operation of tlu^sc prudential 
motives which the majcnity of the opponents of Malthus. 
habitually decry. 

§ 59. The m(;rc completely you give the prudent and 
efficient man control of the results of his labor, the more 
do you localize the pressure of pf)])ulation upon subsist- 
ence, and confine the effects of this pressure to a few. 
Under such circumstances there is habitually that surplus 
of fof)d on which the anti-Malthusian lays so much stress. 
But give the children of the shiftless, by thoughtless char- 
ity or various systems of poor relief, the right to eat the 
substance of the efficient and prudent, and you will soon 
lose both the capital and the morality under which that 
capital has been created. 

When the comfort of ian individual is made dependent 
upon his foresight and prudence, and when the comfort 
of a group is made dependent on the existence of intellec- 
tual as distinct from emotional morality, we shall find 
prudent men and prudent races possessing high comfort 



50 ECONOMIC RESPONSIBILITY. 

and low birth rates. The history of civilization is in large 
measure a history of this development of prudence and 
comfort. Possibly some nations are carrying this conscious 
adaptation of means to ends a little too far for their own 
good. The waste of nerve power connected with the ex- 
ercise of conscious prudence is a real evil, and if carried to 
an extreme may offset the gain attendant upon the pos- 
session and accumulation of capital. The case of France 
is an instance in point. The French people, as a rule, 
logically accept the consequences of the Malthusian 
theory. The birth rate is low, the national wealth high, 
the increase of population almost 7iil. Some writers think 
/ that this course of events has been attended with moral 
/ and physical evils ; that less prudence and keener struggle 
/ for existence would better serve to protect the race 
against danger of degeneration. The same criticism has 
been applied to the conditions prevailing in many parts 
of the United States. 

§ 60. This is a fair point for socialistic criticism. But 
with the average man, the dangers of this extreme are less 
than those of the other. The evils of thinking too much, 
and trusting Providence too little, seem small in com- 
parison with those which arise from trusting Providence 
for everything and not thinking at all. Doubtless Malthus 
made a mistake in giving too much countenance to the 
idea that restrictions upon population must be conscious. 
Eut his socialist critics make a greater mistake in holding 
that they are automatic. The truth would seem to be 
that they are for the most part institutional. The modern 
family and the modern law of capital have acted as a 
powerful system of preventive checks to population. The 
apparently automatic and often non-conscious operation 
of these checks must not blind us to the historical power 
which has established and perpetuated them. The as- 
sumption made by so many of the socialistic critics of 
the Malthusian theory, that the average character of a 



DELINQUENT AND DEPENDENT CLASSES. 5 I 

people will remain unchanged when the economic institu- 
tions under which this character has developed are radi- 
cally modified or abolished, finds no warrant either in 
ancient or in modern history. 

§ 61. It is urged by some of the socialists that the advo- 
cates of the Malthusian theory make too much use of the 
principle of natural selection, and ignore the equally im- 
portant biological principle of functional adaptation. 
They urge that natural selection has in large measure 
done the work which was required of it in inculcating 
prudence, and that, in order to regulate population prop- 
erly, we have only to secure those favorable economic 
conditions to which the race has proved its power to 
adapt itself. But the history of the English poor-law 
(§ 65) seems to show that natural selection has not done its 
work ; that such measure of functional adaptation as has 
been already secured is extremely precarious, and that it 
can only be maintained by continuing the stimulus under 
which it has developed to its present degree of activity. 

§ 62. Although society insists as far as it can that each 
man shall be responsible for himself and his family, it can- 
not carry this principle out to its logical conclusion. We 
cannot kill off the weak -merely because they have been 
unable to support themselves. Still less can we leave the 
unfortunate to die as a result of their incapacity. The 
ethical loss to the community which adopted such a course 
would indefinitely outweigh any material or physical gain. 
The dependent and the unfortunate must, under certain 
conditions, be taken care of by society, even though the 
process of natural selection is thereby hampered. 

§ 63. Besides these two classes there are two others 
which habitually defy the principle that every man should 
earn a living for himself and his children. These are the 
criminal and the pauper. The case of the criminal, how- 
ever hard we may find it to deal with him in practice, is 
easily judged from the standpoint of economic theory. 



52 ECONOMIC RESPONSIBILITY. 

His activity must be repressed and his power of perpetuat- 
ing his race limited. The case of the pauper involves 
more difficulty. He is not, like the criminal, actively 
hostile to society. He claims charity on grounds which 
are often plausible, and which on investigation may pos- 
sibly turn out to be valid. We often do not know the 
real reason why a pauper seeks charity. If it is because 
he can work and will not, he approaches very near to the 
condition of the criminal ; he is trying to get a living 
out of society without rendering society an equivalent. 
If he is willing and able to work but cannot find an op- 
portunity, he is no longer a criminal but an unfortunate. 
If he is mentally or physically unable to work, he is an 
incapable. According as he belongs to one or the other 
of these three classes he demands different treatment, 
both for his own sake and for that of society. Yet it is 
frequently a matter of the utmost practical difficulty to 
see where he belongs. Perhaps he cannot tell himself. 
He may belong to all three by turns, according to the 
circumstances in which he is placed. 

§ 64. In the treatment of paupers there is a natural in- 
clination, both on the part of individuals and of the 
public, to take a charitable view of the matter and give 
help in doubtful cases. People think that the harm from 
denying charity to a deserving man so far outweighs that 
which will result from giving charity to an undeserving 
one that they give relief in a great many cases simply be- 
cause they have no power to make investigations. There 
is an evil involved in such free exercise of private charity 
which people are slow to recognize, but which is all the 
more dangerous on that account. If a man gives money 
to a pauper he seems to be doing an unselfish act. He 
parts with a certain amount of his own property and gives 
it to some one else. But the economic result does not 
stop here. The dollar which is given to an undeserving 
beggar and is spent by him for his own purposes diverts 



INDISCRIMINATE CHARITY. 53 

the product of the labor of the country from the hands of 
the industrious to those of the idle. ^\\q property which 
the giver has placed at the beggar's disposal diverts wealth 
from some other consumer. It enables the pauper to con- 
sume unproductively what otherwise would probably have 
gone to the support of a hardworking man. If the prac- 
tice of indiscriminate giving becomes general it causes so 
many beggars to lead lives of idleness that the production 
of the country is greatly diminished and the industrious 
find themselves compelled to maintain an idle population 
out of a scant product. 

§ 65. The evils connected with private charity are 
more conspicuous in the case of misdirected public char- 
ity, because public charity is dispensed on a large scale 
by officials who have the whole taxable property of the 
community to draw upon. The operation of the English 
poor-law in the early part of the present century fur- 
nished a memorable instance of the troubles which may 
arise from this source. 

The history of poor-relief in England divides itself into 
four periods. In the first period, lasting till 1600, the 
state confined its efforts to the suppression of pauperism, 
leaving the care of the incapable and unfortunate to other 
agencies. The Reformation made some of these agencies 
inoperative ; and during the second period, inaugurated 
by the Act of Elizabeth (1601) the parish authorities were 
charged with the duty of relieving the destitute. Every 
effort was made to prevent such relief from being abused. 
The tendency of the poor to migrate to parishes where 
they received the best treatment was met by the acts of 
settlement, which were framed to prevent people with 
precarious means of livelihood from changing their legal 
residence. The laxity of certain justices who ordered 
relief to be granted on inadequate grounds, was met by 
the imposition of the workhouse test (1713). Parishes 
were encouraged to build workhouses and to make resi- 



54 ECONOMIC RESPONSIBILITY. 

dence in such workhouses a condition of relief. Pauper- 
ism was made as unpleasant as possible in order to reduce 
the burdens of the rate-payer. But in the latter part of 
the eighteenth century a different spirit began to prevail. 
The old practice was felt to be unnecessarily hard on the 
poor. The use of the workhouse as a test was abolished. 
It was made a place of support for the incapable. No one 
was to be sent to a workhouse if he could maintain him- 
self elsewhere. By " Gilbert's Act " (1782) the guardians 
of the poor were charged with the duty of helping them 
thus to maintain themselves ; in other words, of finding 
work for every one who applied for it. Until they succeeded 
in finding work for him, the applicant was to be supported 
in his own home at public expense. The effect of this 
law on the prosperity of the English agricultural districts 
was terrible. It relieved any man who chose to avail him- 
self of its provisions from the responsibility of seeking 
work. It gave the overseers more to do than they could 
possibly accomplish. They could not find employment 
for all who applied. They were compelled to support 
these applicants and their families in reasonable comfort. 
The burden of this support came indirectly on the indus- 
trious laborers. The condition of the man who lived on 
charity was in many districts made better than that of 
the man who supported himself by honest labor. Con- 
spicuously was this the case with persons who had large 
families. The parish allowance for each child was so 
great as to constitute a premium on the increase of num- 
bers. In certain districts the operation of the law not 
only crippled industry, but had most disastrous effects on 
public morality ; practically abolishing female chastity 
among those classes to whom the ample parish allowance 
for the support of children constituted a temptation to 
vice." So great were these evils that in the year 1834 
Parliament was compelled to reestablish the workhouse 

^ " Report of Poor- Law Commissioners, 1834." 



THE WORK TEST. 55 

test. By this change the burden of pauperism, which 
had increased with such rapidity that it threatened to 
cripple English agricultural prosperity, was gradually 
lightened ; but the southern and western counties of 
England have not yet recovered, either materially or 
morally, from the evils which were entailed upon them by 
fifty years of liberal policy in the matter of poor-relief. 

§ 66. In the interest of those who are willing and able 
to work it is absolutely indispensable to reduce the bur- 
den of pauperism to a minimum. Any other policy not 
only puts unnecessary taxes upon the industrious, but 
tends to increase the number of paupers and diminish the 
number of those who are charged with the labor of sup- 
porting them. 

The first step toward reducing pauperism is to separate 
the wilful paupers from the incapable and unfortunate ap- 
plicants for relief. By this policy we are able to refuse help 
to the former class and limit greatly the number of those 
who seek aid under the pretext of belonging to one of the 
two latter. A part of the work of separation consists in 
careful investigation of individual cases. This is our chief 
means of distinguishing the incapable poor who cannot 
work, from those who can. The separation of the unfor- 
tunate from the pauper is more difKcult. To secure this 
end personal investigation on the part of organized chari- 
ties or agents of the government must be supplemented 
by the work test. If we insist that an able-bodied man 
who applies for help must stand ready to do hard work of 
some sort, and if we do not give too much help in com- 
parison with the labor required, we avoid putting a pre- 
mium on pauperism. We make it probable that a man 
who applies for help under such conditions really deserves 
it, and is not making the absence of work a convenient 
pretext for living in idleness. ' 

' It is an open question whether the administration of relief, and especially 
of emergency relief, should be in the hands of the same authority that im- 



56 ECONOMIC RESPONSIBILITY,, 

§ 6'j. The work test just described is primarily and 
chiefly used as a means of determining the character of 
the appHcants. If it can be so arranged that the product 
of the labor which is thus tested is worth something to 
the community, well and good ; but the attempt to make 
the labor useful must not be allowed to interfere with its 
character as a test. If this once happens, the efforts to 
render the results of relief work valuable to society are 
worse than useless. 

§ 68. These efforts take three forms: i. Public works 
to utilize the power of those who are temporarily thrown 
out of employment. 2. Labor colonies to give perman- 
ent occupation to those who are in need of it. 3. Ad- 
vances of money procured by the credit of the govern- 
ment, and placed at the disposal of those who expect to 
repay it by their work. None of these plans can be said 
to have accomplished the object in view. 

§ 69. There is a specious argument in favor of public 
works for the relief of those who are temporarily unem- 
ployed. People say that such work would have to be 
done, sooner or later, in any event ; that the unemployed 
must be helped in some shape or other; that even if 
those who are set to work upon these things do not earn 
the full amount of their wages, the little they may accom- 
plish is better than nothing, as otherwise they would have 
to be wholly supported at public expense. They also 
add that employment on useful work of this kind pre- 
serves the self-respect of the laborer which the direct giv- 
ing of charity tends to destroy. But this view of the 
matter is a somewhat dangerous one. There is reason to 
fear that public works arranged with this motive and ob- 
ject in view do more harm than good. In the first place, 
most public works cannot be- constructed in the winter 

poses the tests. If the detection of fraud becomes the chief function of any 
organization, such a body is sometimes handicapped in its attempts to dis- 
cover and relieve poverty that is not fraudulent. 



PUBLIC RELIEF WORKS. 5/ 

season, when destitution is greatest and the need of tem- 
porary relief most pressing. In the next place, the amount 
accomplished by laborers who are set to do such work 
without special training is greatly overestimated by those 
who have not had experience. It seems a simple matter 
to build a sewer, but it requires an amount of training for 
which the man who is given such work as a temporary 
means of relief has had neither the time nor the oppor- 
tunity. In the third place, the seeming advantage from 
the construction of these works causes too many opera- 
tions of the kind to be undertaken, and diverts to these 
operations a certain number of laborers who would grad- 
ually have found profitable and useful employment in 
lines for which they were more fitted. The net loss to 
the tax-payers from this large amount of ill directed 
labor is greater than that which would have resulted from 
the bestowal of a smaller amount of direct charity to the 
persons who, by investigation and by the work test, had 
been found worthy to receive it. Finally, the preserva- 
tion of self-respect to the laborer by this process is more 
apparent than real. If it is known that public works are 
being constructed for which laborers are employed on 
something better than a commercial basis, the pressure for 
these positions makes them an object of political wire» 
pulling. It is a false notion of self-respect which leads 
the man who can take money out of the public by chi- 
canery to rate himself higher and be rated higher by so- 
ciety than the one who truthfully confesses to himself and^ 
others the real ground on which property is diverted^ 
his support. 

'X Some of these objections apply with less force to works 
df agriculture and land improvement, because the danger 
of undue diversion of laborers into this line of industry is 
slight. We are suffering from a drift of population into 
mechanical industries. If we can keep some of this drift 
back, and employ it in the production of food, we have a 



58 ECONOMIC RESPONSIBILITY. 

twofold advantage. First, the product of agricultural 
labor will keep the producers from starvation, whether 
they can sell it or not. Second, the character of the work 
is not such as to render it attractive to any but those who 
really deserve relief. 

§ 70. Labor colonies and similar means of furnishing 
permanent employment do not as a rule reach the class 
for which they are intended. They do not teach men to 
be self-supporting. They become " places of refuge for 
those who have suffered moral as well as physical ship- 
wreck " ; not for the industrially unfortunate, but for the 
chronic or vicious poor. 

Proposals for an advance of state credit to laborers who 
could not find employment on advantageous terms were 
most actively urged by Lassalle some forty years ago. He 
would have allowed associations of laborers to pledge the 
future product of their labor as security for such ad- 
vances, so that the workmen would be relieved from their 
present dependence on the capitalist, and be put in a 
position to exercise their powers to the best advantage. 
But no association of workmen is in a position to guaran- 
tee the utility of its future product to society. The very 
industry of its members might readily result in over- 
production of things that were not wanted ; nor could the 
agents of the government, on the basis of any statistics 
yet devised, be trusted to guard against this danger. If 
too many men made watches, the selling price of watches 
would not cover the advances made by the government ; 
and, what is more important, the utility of such watches 
would not make good to society the waste of food and 
other forms of public capital consumed by those engaged 
in their production. 

If such advances are confined to agricultural laborers, 
the danger is, for the reasons already given, much less. 
Several schemes have been proposed for this end. The 
one most under discussion at present is the allotment 



AID IN FINDING EMPIOYMENT. 59 

system, which plays a somewhat important part in Eng- 
lish social policy. Under this system the public authori- 
ties buy land for the use of actual cultivators in small 
plots, borrowing the money for that purpose at a low rate 
of interest. It is confidently expected that the occupiers 
can pay the government a sufficiently large sum to make 
the experiment financially self-supporting, and that they 
will thus be relieved without great public cost from most 
of their present dependence on the fluctuations of trade. 
This plan has much to recommend it ; but it has not 
been tried long enough for decisive judgment as to its 
success. 

§ 71. Less radical in their aims, but perhaps quite as 
promising in their operation, are the attempts to help 
people to find work for themselves instead of trying to 
make it for them. In Germany, bureaus of information 
have accomplished much in this way ; and the German 
police system is so efificient that it has been found pos- 
sible to provide food and lodging for those who were 
actually in search of work without great danger that such 
relief would be misused. But in the absence of such 
effective police control this system would certainly in- 
crease the number of tramps who make the seeking of 
work a pretext instead of an object of their journey, and 
might readily result in a condition like that which pre- 
vailed in the worst days of the English poor-law. 

Systematic effort to give the unemployed a chance to 
find work often sets in its true light a form of pauperism 
which is widespread, and shifts the responsibility for many 
cases of destitution from society as a whole to the indi- 
vidual with whom it belongs. There is a large number 
of people in times of commercial crisis who really want 
work but who want it in cities, and who are absolutely 
unwilling to engage in those lines of food production 
which require them to live in the country. The number 
of people who ask relief and are willing to take even light 



6o ECONOMIC RESPONSIBILITY. 

farm-work as a means of earning it is exceedingly small. 
They insist on their right to live, and in many instances 
are prepared to maintain that right by a readiness to work 
in certain trades in the city, but they absolutely refuse to 
engage in the production of food, which alone can keep 
the community alive. 

§ 72. Another means by which it is proposed to re- 
duce the burdens of pauperism is compulsory insurance. 
This can be utilized in some measure for the incapa- 
ble as well as for the unfortunate, if they have been com- 
pelled to contribute to the insurance funds before they 
have become incapacitated for work. 

The system of compulsory insurance has been more 
completely carried out in the German Empire than any- 
where else. Small contributions are levied from the 
workmen or from their employers to create a fund for the 
support of the workman and his family when he becomes 
ill or superannuated. There are many reformers who are 
anxious that other countries should follow the example 
of Germany. But the experiment has not progressed far 
enough to pass judgment on its success. In many respects 
the gain to the public from a system of this kind is more 
apparent than real. The payments to the insurance funds 
must chiefly, if not wholly, come out of wages. Even 
though they be nominally levied on the employer, he is 
compelled by competition with other employers who are 
not subject to this levy to reduce in corresponding degree 
the wages which he pays. If the workman receives less 
wages, he must either consume less or save less. So far 
as he economizes on useless items of consumption the in- 
surance fund thus created represents a positive gain to the 
community, providing for the workman's support in the 
future without causing any corresponding general loss or 
burden in the present. But if he economizes on articles 
that are necessary or useful to his well-being and that of 
his family, he lessens his own labor power and that of his 



COMPULSORY INSURANCE. 6l 

children and diminishes rather than increases the general 
ability of the community for maintaining the necessary 
burdens of poor-relief. If, finally, he makes these pay- 
ments out of money that he otherwise would have saved, 
he transfers the provision for his support from his own 
shoulders to that of the public organization. He becomes 
less self-supporting, and more dependent on society. 

§ 73. The opposition of friendly societies to schemes 
of government insurance is something quite rational. 
These societies are in their nature agencies for the 
promotion of voluntary saving as a means of mutual 
insurance. If the government uses compulsory saving 
as a means to the same end, it takes away the ground 
for the existence of these societies and substitutes a 
system which secures the same material results to the 
workman but fails to secure the same educational and 
moral ones. To those who regard these educational and 
moral results as a chief advantage in voluntary saving, 
the change to a compulsory system looks like a step 
backward. 

§ 74. There is also a positive danger that the amount 
of accident and sickness may increase under the opera- 
tion of compulsory insurance. The accident insurance 
law, in its early application to the German railroad ser- 
vice, had a distinct effect of this kind. The number of 
disabling accidents was increased. The individual, being 
freed from responsibility for his own loss of time, put 
himself in a position where more aggregate time was lost. 
Whether this was due to increased carelessness or to slack- 
ness in returning to work is a matter of comparatively 
slight consequence. In either event, the diminution of 
individual responsibility and assumption of such respon- 
sibility by public organizations lessened the incentives 
to continuous work and to the care which makes such 
continuous work possible. In factory insurance this dif- 
ficulty can perhaps be avoided by localizing its manage- 



62 ECONOMIC RESPONSIBILITY. 

ment in such a way that the people who have to pay the 
cost of unnecessary accidents can see them and guard 
against their recurrence. Accident insurance works much 
better in Germany, where it is locally administered, than in 
Austria, where it is a national matter. 

§ 75. Finally, there is a danger that the apparent ad- 
vantages of an insurance system of this kind may blind 
public opinion to the more real advantages of better 
forms of insurance. A certain section of the public is so 
dazzled by the prospect of pensions that it overlooks the 
true ground on which pensions are justified. It comes to 
regard the pension as an end in itself rather than as a 
means of relieving the general funds of the government 
of a burden. Schemes are already proposed in England 
for giving a pension to every one above a certain age, 
independent of any contribution which he may have made. 
People are impressed with the advantages of a pension 
and with the dif^culties of every special system of contri- 
bution for securing it. They therefore propose to trans- 
fer the burden of such payments to the general tax account. 
They do not see that three quarters of the arguments for 
pensions are based upon their usefulness in lightening the 
claims upon this general account, and that a system which 
increases these claims undermines the very grounds on 
which it is advocated. It is sometimes argued that the 
total amount of these claims is not really much increased 
by the adoption of a liberal pension policy : because, pen- 
sions or no pensions, society must in the last resort sup- 
port the aged who have worked out their usefulness, and 
no harm can be done by recognizing as a right on the 
part of the individual what society already recognizes as 
a duty. But this is an unsound position. There are cer- 
tain things which society must do in justice to itself, which 
it cannot safely allow individuals to demand in justice to 
themselves. If you give every man a right to a pen- 
sion when he is incapable of self-support, you tacitly ap- 



NECESSITY OF SELF-RELIANCE. 63 

prove his failure to provide for himself and his children. 
That the necessary degree of production and of economy 
by the community as a whole would be maintained if such 
a point of view were adopted, seems highly improbable. 
We need measures which shall increase individual re- 
sponsibility rather than diminish it ; measures which shall 
give us more self-reliance and less reliance on society as a 
whole. We cannot afford to countenance a system of 
morals or law which justifies the individual in looking to 
the community rather than to himself for support in age 
or infirmity. 



CHAPTER III. 

COMPETITION. 

Freedom of Exchange — Bargaining — Mercantile Competition — Market Price 
— Effects of Competition — Normal Price — Value — Socialistic Theory of 
Value. 

J. E. Caimes : " Some Leading Principles of Political Economy, Newly 
Expounded." London (and New York), 1874. 

A. Marshall: " Principles of Economics." Vol. i. 3d ed. London and 
New York, 1895. 

W. S. Jevons : " Theory of Political Economy." 3d ed. London and 
New York, 1888. 

F. V. Wieser : "Natural Value." (Trans, by Malloch.) London and 
New York, 1893. 

§ ^6. In mediaeval times separate families and com- 
munities supplied their own needs to a degree which it 
is now hardly possible to realize ; although the plantation 
life in the Southern States a generation ago furnished in 
some respects an approximation to the feudal type. In 
such a condition of society the laborer has not, as a rule, 
any large surplus above the bare necessaries of life. The 
excess of his production over his consumption goes into 
the hands of the lord of the manor or plantation. It is 
the ruling class alone which has goods to exchange for 
outside products. Within the plantation or manor every- 
thing is done by the inhabitants for one another, under a 
system of labor wholly or partly compulsory, and on 
terms rigidly fixed by custom or by superior authority. 
Each individual, from master to slave, finds his consump- 
tion no less than his production closely restricted. A 
man's labor and his enjoyments both form part of the 

64 



THE BEGINNINGS OF TRADE. 65 

status into which he was born and from which his most 
strenuous exertions can hardly free him. He may be 
bound by caste regulations as in India, by positive law 
as was the case in many parts of Europe, or by the mere 
force of custom, which often needs no formulated law to 
give it effect. 

In such stages of society trade plays a relatively unim- 
portant part. The fundamental characteristic of the 
manorial group in England in the thirteenth century, says 
Ashley, was its self-sufificiency. The village included men 
who carried on all the occupations and crafts necessary 
for every-day life. There was little room for anything 
like freedom of exchange. The few things that were 
purchased were paid for at prices fixed by custom. The 
value of an estate was measured by the physical resources 
which its owner possessed. The difference between the 
measurement of public and private wealth, noted in the 
first chapter, had not yet come into play. 

§ "JJ. But when the nation became sufificiently ad- 
vanced to carry on commerce a different state of things 
developed. Its members produced more than they needed 
for their own requirements and sold the surplus to others. 
The country obtained much of what it used from the 
towns. The people in the towns lived on food provided 
by the country. Markets and fairs were held at stated 
times, to which men of different occupations could resort 
as a means of buying what they needed and selling what 
they produced. In such a market, prices were never 
wholly fixed by custom, but, in some measure at least, by 
the relative number of buyers and sellers. The rate of 
exchange was not based upon the number of days' labor 
involved in the product, but upon the amount which the 
consumers were ready to give in exchange for it. The 
more remote the point of origin of the goods purchased, 
the less dominant was the influence of custom in fixing 
the price which should be charged. 



66 COMPETITION. 

§ 78. As labor became freer and more diversified, peo- 
ple produced more and more for one another and less 
exclusively for themselves. The advantages of division 
of labor made themselves felt. If a man attempted to 
supply himself and his family with everything, he 
was obliged to spend a great deal of time for a compara- 
tively small product. The many occupations, which he 
was forced to pursue by turns, prevented the attainment 
of a high degree of dexterity in any one of them. The 
waste of time in passing from one to another meant a 
corresponding loss of efficiency. When regular means of 
sale were assured, each man found it more profitable to 
devote himself to some one thing in which he had special 
advantages, and to exchange the surplus product which 
he could not use for the goods which others were ready to 
offer. In this way it was possible for the community to 
combine the advantages of specialized production and of 
diversified consumption. Each man could contribute the 
largest share to the public wealth by confining his produc- 
tion to one line. He could obtain the largest use and en- 
joyment from the public wealth by spreading his consump- 
tion over a great variety of lines. As hand labor was 
gradually supplemented and rendered more efficient by 
machinery the specialization of work became more and 
more marked. In the industrial civilization of the present 
day there are few who produce all that they need for their 
own requirements. The most prosperous man is usually 
one who consumes only a small portion of his own pro- 
duct and has a large surplus to sell to others. 

§ 79. Freedom of production and of trade are accom- 
panied by increased freedom in consumption. With the 
adoption of a system which gives a great many individuals 
property to exchange, there has been a gradual abandon- 
ment of legal enactments which were intended to re- 
strict exchange and limit expenditure. Sumptuary laws, 
which prescribe the dress and food which individuals 



SUMPTUARY LAWS. 6/ 

may use, have for the most part become a thing of the 
past. We have ceased to pass statutes to prevent men 
from ruining themselves in their own way, if they see fit 
to do so. Only in those cases where the individual, by 
exercising rights of trade, will injure others as well as 
himself, do we continue to prohibit sales and purchases. 

The clearest case for prohibiting such transactions is 
connected with the abolition of slavery. Formerly a man 
could buy and sell slaves, and in a great many communi- 
ties he could sell himself or his children into slavery. 
To-day it is recognized that such a transaction is a public 
Avrong, not a private one. The man who sells himself or 
his children into slavery harms not only the parties im- 
mediately interested, but the industrial future of the 
nation as a whole. Such dealings are therefore abso- 
lutely forbidden. But the corresponding evil and wrong 
of prostitution is allowed to go on unheeded. It is only 
where public sentiment is practically unanimous as to the 
existence of a public necessity that prohibitory laws can 
be enforced. The case of the liquor traffic furnishes a 
marked illustration of this truth. No one denies that a 
great deal of harm is done by the sale of intoxicating 
drinks ; but in the majority of communities society finds 
it extremely difficult to enforce any effective restrictions 
upon such traffic. The doctrine of individual freedom 
has made such progress that most communities tolerate 
the exercise of such freedom in many transactions which 
their moral sense distinctly condemns. 

§ 80. When we try to make positive laws as to what 
people shall buy and sell, instead of negative ones as 
to what they shall not buy or sell, we are confronted 
with even greater obstacles. The enforcement of sanitary 
regulations, however necessary for the public health, is 
attended with extreme difficulty. There is a universal 
consensus of opinion that tenement houses should con- 
form to certain requirements with regard to light, air, and 



68 COMPETITION. 

drainage, but the difficulty of giving effect to these re- 
quirements is enormous. If the demand for bad tene- 
ment houses is such that people find it profitable to build 
them and to let them, it is nearly impossible to stop such 
traffic. The erection of model dwellings enables that 
class of the community which appreciates the advantage 
of such improvements to enjoy them. But it does not 
prevent the rest of the people from living as they did 
before, nor does it stop the tenement-house owner from 
making his profit out of public squalor. Even if some of 
the worst tenements are condemned by the exercise of 
municipal authority and better ones are built in their 
places, the result is too often merely an overcrowding at 
some other point. Public knowledge of the laws of health 
and public responsibility as to the evils of overcrowding 
are needed in order to give effect to any statute or ordi- 
nance. 

A striking instance of the difficulties connected with the 
effort to avoid overcrowding was furnished by the experi- 
ence of Miihlhausen. This city, which formed the centre 
of the cotton industry of upper Alsace, was long noted 
for the model dwellings in which its operatives lived. 
But the direct personal and unofficial investigations of 
Herkner disclosed the fact that these supposed advan- 
tages were in large measure illusory, and that any slight 
gain at some points was offset by increased pressure and 
more shameless overcrowding at others. 

§ 8 1. A certain amount of positive legislation is al- 
ways necessary for public health and public enlighten- 
ment. We cannot allow the ignorant man to exercise 
his freedom in cultivating bacteria or in leaving his chil- 
dren without education. The one is dangerous to the 
health of the whole community, the other to its future 
intelligence and morals. In neither case will a let-alone 
policy cure itself by the elimination of the unfit. Wise 
and unwise together are bound to suffer in very consider- 



EFFECT OF CUSTOM ON EXPENDITURES. 69 

able measure from the pestilence engendered by public 
filth or the corruption attendant on pubhc ignorance. In 
cases where such positive legislation is found necessary, 
it is generally best for the government to take the trans- 
action wholly out of the realm of sale and purchase, and 
to provide means by which sanitation and education can 
be had at the expense of the tax-payers. Compulsory 
education involves public schools ; compulsory drainage 
involves public sewers ; compulsory vaccination involves 
public medical service. Only in those cases where viola- 
tions of the statute are done in public sight, under the 
authority of parties who can be held responsible — as in 
the case of unhealthful and dangerous appliances in fac- 
tories — do we find important exceptions to this rule. 

§ 82. Although laws prescribing what a man may buy 
or sell have fallen into disuse, it must not be supposed 
that every man exercises his intelligence and pleasure to 
buy what will give him the most happiness. People are 
bound by custom where they have ceased to submit to 
law. A large part of the expense of most people is regu- 
lated, not by their own desires and demands, but by the 
demands of the public sentiment of the community about 
them. The standard of life of every family is fixed in 
large measure by social conventions. Few are intelligent 
enough to break away from those conventions, even where 
they are manifestly foolish. Although we have made 
much progress in the direction of economic freedom, it is 
a mistake to assume that the authority of custom in these 
matters is a thing of the past. With most men, custom 
regulates their economic action more potently than any 
calculation of utility which they are able to make. Nor 
can we assume, as some writers are prone to do, that 
such custom represents the average judgment of the com- 
munity as to the things needed for the comfort and happi- 
ness of its members. It represents an average absence of 
judgment — a survival of habits which doubtless proved 



JO COMPETITION. 

useful in times past, but which in many instances have 
entirely outlived their usefulness. 

The success of advertising shows how little intelligence 
is habitually exercised in these matters. A man does not 
generally use his nominal freedom to buy what he wants 
until some one comes and tells him in stentorian tones 
what he wants to buy. The authority of custom and 
tradition can only be overcome by the authority of drums 
and trumpets. It is a mistake to draw too fine-spun de- 
duction as to the motives which guide buyers in their 
choice, when three quarters of the buyers exercise no 
choice at all. It is not merely that people want things 
which hurt them, or which fail to do them the maximum 
good — a point well developed in the writings of Patten — 
but that they buy things without knowing whether they 
want them or not, through sheer vis inerticB. 

§ 83. Where consumption has become diversified and 
the division of labor has established itself, the determina- 
tion of the rate of exchange of goods between different 
producers becomes a matter of cardinal importance. In 
undeveloped societies a man's wealth is measured in the 
physical things which he has at command. He is rich 
or poor according to the extent of his lands, the number 
of his dependents, the herds and the crops which he can 
raise for their support. But when property has taken the 
place of slavery as an economic force, and when people 
have begun to exchange their property more or less freely 
with one another, a man's personal wealth is estimated 
in money. The goods which he makes are valued, not 
as a source of enjoyment to the producer himself, but 
as a means of commanding the goods and services of 
others in the open market. The measure of his wealth is 
found in the exchangeability of his product and its power 
to command a price. 

A price., in the broadest sense of the word, is the 
quantity of one thing which is exchanged for another. 



BARTER. 71 

§ 84. Where two persons exchange their goods or 
services, without the intervention of money, the transac- 
tion is known as barter. I may barter a ton of coal for a 
pair of shoes, or an hour's labor for a breakfast. Under a 
system of barter, either man's contribution may be 
regarded as the price of the other. We may consider the 
breakfast as the price of the labor, or the labor as the 
price of the breakfast. 

Barter flourishes chiefly among uncivilized communities, 
or those reduced to severe straits by the operation of a 
destructive war ; though survivals of this method, as well 
as of many other uncivilized ones, may be seen in the 
dealings of children with one another. Barter is not 
available in any complicated system of trade. If A makes 
shoes and wants cloth, while B makes cloth and wants 
shoes, the two can resort to barter ; but if B, who makes 
cloth, wants flour, while C makes flour and wants shoes, 
the attempt to provide for the needs of all three men by 
a system of barter becomes very perplexing. The difiti- 
culty is met by a resort to money; that is, to some 
medium of exchange which A, B, and (Tare all ready to 
accept. If A sells a pair of shoes to C for five dollars, he 
does not need to inquire whether C makes cloth ; he can 
take the five dollars and buy cloth of B. B can then take 
the five dollars and buy flour of C. Through the inter- 
vention of money each producer has sold his product to 
the man who wanted it, and obtained what he wanted 
from the man who produced it, in a way which would 
have been almost impossible under a system of barter. 

§ 85. Just what constitutes money is a question which 
can best be answered at a later stage of our inquiry. For 
the present it is enough to say that it must be universally 
acceptable throughout the community, so that it can be 
used for the purchase of goods or services of every kind ; 
and that it must be sufficiently homogeneous in character 
for people to desire a given quantity of it, rather than a 



72 COMPETITION. 

particular /zVf^ of it.* Anything which possesses these two 
characteristics may serve as money. The actual money 
of any civilized nation usually consists of gold, silver, and 
paper, accredited with the stamp of the government. The 
international money of the world, acceptable by weight 
without the stamp of any government, is gold. 

Under the modern commercial system, prices are meas- 
ured in money. A price, in the commercial sense of the 
word, may be defined as the quantity of money for which 
the right to an article or service is exchanged. The man 
who furnishes the article or service is known as the seller ; 
the man who furnishes the money is known as the buyer. 

§ 86. If the transaction is an isolated one, and not one 
of a series of similar transactions, the price is usually 
fixed by bargaining. Suppose A wishes to sell a house 
unlike other houses in situation or construction, and B is 
the only man who, for the moment at any rate, wishes to 
buy it. It may happen that the maximum price which B 
is willing to pay is less than the minimum which A is wil- 
ling to accept. In that case there will be no sale. Or it 
may happen that B's maximum exactly coincides with y^'s 
minimum. In that case there will be a sale at exactly this 
price. But it may also happen that 5's maximum is some- 
what higher than A's minimum ; and in view of this pos- 
sibility, A is unwilling to name the lowest price at which 
he will sell until he sees whether B may not be induced to 
pay more, while B is equally unwilling to name his highest 
price until he sees whether A may be induced to sell for 
less. So it will probably happen that A names a price 
somewhat higher than the minimum which he would ac- 
cept, and that B replies by offering a price somewhat less 

' Whenever certain pieces of money, be they few or many, are decidedly 
preferred to the general stock, they are rapidly withdrawn from circulation. 
They may find their way into the collections of numismatists, into the strong 
boxes of bankers, or even into the mints of foreign countries, according as 
one cause or another has produced the preference in question. 



BARGAINING. 73 

than the maximum which he is prepared to give. Thus 
A might ask a nominal price of $15,000 when he would 
be ready to take $12,000 rather than lose the chance of 
selling the house ; while B might make a first offer of 
$11,000, though he would be prepared to pay $13,000 
rather than lose the chance of buying it. Successive offers 
bring A and B nearer together, and finally .the house is 
sold at some price not less than $12,000 nor more than 
$13,000; the exact figure depending on the relative skill 
in bargaining shown by A and B. 

§ 87. But if there are other house owners in the same 
situation as A, or other buyers in the same situation as ^, 
the matter assumes a different aspect. A is afraid to ask 
an exorbitant price for fear B may go and buy of some 
one else ; B is unwilling to begin with an unduly low 
figure, for fear that A may break off negotiations with 
him and deal with some other buyer. The moment 
there are other sellers who can enter into competition 
with A, or other buyers who can enter into competition 
with B, the chance for bargaining is greatly restricted, if 
not altogether abolished. 

"^Competition may be defined as the effort of rival sellers 
to dispose of their goods and services, or of rival buyers 
to secure the goods and services which they require ; an 
effort limited by the desire of the seller to secure as high 
a price as possible, and by the desire of the buyer to pay 
as low a price as possible.^ Its existence shows that peo- 
ple are guided in their dealings by individual self-interest. 
Its action may be totally suspended by combination, 
where sellers or buyers act in concert and not in rivalry. 
An effective combination of sellers is known as a mo- 
nopoly. It may also be greatly modified by custom or 
by sentiment. Custom, with or without the authority of 
law, often causes the seller to accept a price lower than 

' It may be briefly but pertinently defined in the vernacular as the effort 
not to get left. 



74 COMPETITION. 

that which he could otherwise obtain. Sentiment, on the 
part of an individual or of the public as a whole, occa- 
sionally leads the buyer to pay a larger price for goods or 
services than that which would be absolutely necessary for 
securing them. 

§ 88, A place where prices are determined by competi- 
tion is known as a market. It makes no difference whether 
the goods are actually exposed for sale, as in the mediae- 
val markets, or largely bought and sold on the basis of 
warrants or telegraphic orders, as in the produce ex- 
changes of to-day. The essential thing is that different 
buyers and sellers shall know something about one an- 
other's transactions, so that the individual buyer need not 
pay more than the prevailing rate, nor the individual seller 
be forced to sell for less than the prevailing rate. 

There may be different markets for the same article in 
the same place. The prices in the wholesale market are 
determined by one set of conditions, and those in the 
retail market by another. Though not wholly indepen- 
dent, they can often move separately. 

It is doubtful whether we should apply the term market 
to places or groups of transactions where there is compe- 
tition on one side only, and monopoly or combination 
on the other ; where the buyers compete and the sellers 
do not. 

§ 89. In any given market, the supply of an article, in 
its technical sense, is the amount offered at a given price. 
It tends to increase as the price increases. It must be 
distinguished from the stock, which is an absolute amount 
independent of price. 

In any given market the demand for an article is the 
amount which will be taken at any given price.' It tends 

^ There is another sense of the word demand, occasionally used by nearly 
all the older economists, and emphasized by Cairnes. In Cairnes' use of the 
word, it means, not the quantity of a particular article demanded, but the 
quantity of money, or other things representing general purchasing power, 



MARKET PRICE. 75 

to diminish as the price increases. It must be distin- 
guished from desire, which is a feeling, while demand is a 
concrete quantity. Desire is the cause of demand, but 
the two terms are different in kind and can never be used 
interchangeably. 

§ 90. The market price of an article, under the modern 
commercial system, is the price at which the demand is 
equal to the supply. For, if the supply at any given 
price is greater than the demand, the several sellers will 
be driven to make special efforts and concessions in order 
to dispose of their goods ; while conversely, if the demand 
at any given price is greater than the supply, the buyers 
will be led to offer special inducements in order to get 
the goods which they want. Suppose that cotton of a 
certain grade is selling in the New York market at eight 
cents a pound. If the amount of cotton brought to New 
York from week to week to be sold is exactly equal to the 
amount taken out of the New York market by the con- 
sumers, the price is likely to remain at eight cents. But 
if the amount brought is in excess of the amount taken 
away, the sellers will see that the stocks are increasing, 
and each will be afraid of being left with unsold cotton 
on his hands which he may be unable to dispose of, 
except at a great sacrifice. Competition among sellers 
now becomes active. Each seller strives to get rid of his 
cotton, — at eight cents if possible, but if that price cannot 
be had, at seven and a half cents, or perhaps even at seven 
cents, rather than be left with unsold and unsalable cotton. 
As this process goes on, the lower prices induce the 
buyers to take more cotton, and discourage the pro- 

which buyers stand ready to give in exchange for it. The word is used by 
the commercial world in both senses with about equal frequency. It makes 
comparatively little difference which meaning we adopt, as long as we 
adhere to the one selected. While Cairnes' definition is for some purposes 
better than that given in the text, there are many other purposes for which 
it is not so good. There appears to be no sufficient reason for departing 
from the prevalent usage of modern economists. 



76 COMPETITION. 

ducers from sending so much to New York ; in other 
words, they increase the demand and diminish the supply, 
until a new point of equilibrium is established. How far 
the actual price goes down depends for the moment 
chiefly upon the amount of additional use of cotton which 
is caused by a fall in price. If a difference of half a cent 
a pound greatly stimulates the manufacture of cotton, 
the price in the case supposed is not likely to fall below 
seven and a half cents. If, on the other hand, the differ- 
ence of half a cent has no great effect on consumption, 
the price for the time being is likely to fall to seven cents 
or even lower. 

Now take the opposite case. Suppose that at eight 
cents the demand is greater than the supply. We shall 
have competition of buyers instead of sellers. There is 
not going to be enough cotton for everybody at eight 
cents. A cotton merchant or broker sees that the stock 
of cotton is being gradually reduced. If this process 
goes on, it means that there will be a scarcity in the im- 
mediate future. He therefore refuses to part with his 
cotton at eight cents, hoping to be able to command 
higher prices a week hence. Others follow his example. 
The buyers can no longer get the amount of cotton they 
need for eight cents a pound. Some are unwilling to give 
more than eight cents and drop out of the market ; 
others are prepared to pay eight and a half cents; still 
others will go as high as nine cents rather than do with- 
out the cotton. Whether the actual price goes up to 
eight and a half cents, or to nine cents, or even higherj 
depends largely on the number of buyers who withdraw 
from the market at successive changes in the price. If a 
large proportion of the buyers will not pay more than 
eight cents, the merchants can increase the price but 
little. The man who holds his cotton at a price which 
drives the buyers out of market cuts off his own head. 
But if a large proportion of the buyers are prepared to 



THE DEMAND CURVE. 



77 



pay nine cents, the merchant will probably do well to 
refuse to sell for less than this figure. If he is wise, he 
will continue to hold back his cotton as long as the stock 
in the market continues to diminish ; that is, as long as 
the amount taken by consumers at existing prices exceeds 
the amount sent to market by producers. When this 
state of things is on the point of being reversed, he will 
sell. No further rise in prices is probable. He is much 
more likely to see a fall, and cannot afford in such an 
event to be left with unsold goods on his hands. The 
self-interest of each merchant leads him to refuse to sell 
as long as the demand exceeds the supply, and to sell 
when the two things become equal to one another. 



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§ 91. Beginning at the point O (Figure i), lay off in 
the horizontal line OP a series of points whose distances 
from O shall represent successive prices of cotton per 
pound. From these successive points, representing 
price, let vertical lines be raised representing quan- 
tities of cotton which will be taken by the purchasers at 
those prices in the course of a week. These quantities 
tend to fall as the price rises. If the purchases at eight 
cents are 40,000 bales per week, we may assume for the 
sake of illustration that only 30,000 bales would be taken 
at nine cents, and only 25,000 at ten cents ; but that a fall 
in price to seven cents would call out a demand for 50,000 
bales a week, and a fall to six cents a demand for 65,000 



78 COMPETITION. 

bales. A fractional price, like seven and a half cents, 
would call forth a demand intermediate between that at 
eight cents and that at seven. If we establish a number 
of points in this way and connect them by a line, we shall 
have what is known as a demand curve, representing the 
whole series of relations between price and quantity 
demanded. 

If, in Figure 2 DD' is the demand curve for a given 
article in any given market, then at any assumed price 
Op^, the demand will be represented by the line p,d^\ 
similarly at the prices Op^, Op^, the demand will be 
represented respectively by the lines p/iz, p^d/ 

§ 92. The shape of the demand curve is different for 
different commodities,^ and even for the same commodity 
in different markets. But its form is limited by one gen- 
eral law; the quantity demanded tends to increase as the 
price diminishes, and to diminish as the price increases. 
This is readily established by observation of commercial 
facts. It can also be proved theoretically, as a deduction 
from observed principles of human nature. 

It is a well known law of psychology that the same 
stimulus, if repeated more and more rapidly, produces a 
constantly diminishing sense of added pleasure or pain. 
As an economic consequence of this, rapidly increasing 
supplies of the same class of goods do not proportionately 
increase the happiness of their possessor, but are all the 
time diminishing in their utility ^ to him. The first slice of 

' In these figures the horizontal lines represent prices, and the vertical 
lines quantities of the commodity. Horizontal lines must therefore be com- 
pared with one another, and vertical lines with one another ; we must not 
attempt to take the ratio between a horizontal and a vertical line, since the 
two represent quantities of different kind, with different units of measurement. 

* This point is further developed in chapter x. 

^ Utility, as the word has been used by writers on economics, means the 

power of satisfying a temporary desire rather than the power of doing a per- 

> manent good. In this sense, whiskey would be regarded as having a high 

degree of utility to many to whom it is by no means beneficial in the long 

run. 



MARGINAL UTILITY. 79 

bread received in the course of a day has almost infinite 
utility as a means of preserving life. The second has 
great utility as a means of avoiding hunger, but not so 
great as the first ; the third makes less difference than the 
second ; and when we come to the tenth, the added grati- 
fication is perhaps hardly appreciable. So it is to a greater 
or less degree with all other commodities. Additional 
increments in quantity do not bring proportionate increase 
of enjoyment or utility. The total utility of the larger 
amount is greater than that of the smaller, but the mar- 
ginal ' utility of additions to the supply available for any 
individual keeps diminishing. 

§ 93. If there is only a small amount of a commodity 
in the market the buyers are often extremely anxious to 
add to their consumption, and are willing to pay high 
prices. If the amount available becomes larger, and the 
most urgent needs of the buyers have already been satisfied, 
the holders must offer inducements to those whose need is 
less urgent ; that is, they must lower prices to create a larger 
demand. The demand for cotton at ten cents a pound 
comes from those to whom the utility of adding to their 
stocks of cotton is greater than the sacrifice involved in 
earning ten cents, or in giving up something else which 
the ten cents might purchase.'' The demand for cotton 

' Also called _/?««/ utility. 

^ Desire alone cannot create demand. A man must have the means of 
payment ; and these means usually come from the supply of goods or services 
which he has previously sold. If producers and consumers come in personal 
contact with one another each man's supply of commodities which he sells 
becomes a demand for the commodities of others which he wants to buy. 
He will sell his goods, and increase their supply, as long as the utility of what 
he can buy at the market rates of exchange is greater than that which he_ 
sacrifices in parting with his own products. This double aspect of his goods 
as supply and demand forms the basis of the theory of reciprocal demand 
which was developed by Cairnes in popular form and by Walras with scientific 
accuracy. 

But if an interval elapses between the time when a man makes prices for ,' 
the goods which he sells and spends the money thus obtained in the purchase ) 



8o COMPE TITION. 

at nine cents comes from those to whom its utility is 
greater than the sacrifice measured by nine cents. Each 
reduction in price increases the amount of goods whose 
utility to the buyers is greater than that which is measured 
by the price charged ; that is, it increases the demand. 
It may, however, happen that the stock of an extremely 
useful article is so great that no reduction in price will 
serve to create a commercial demand for the whole. 
Water, except in cities, is an example of this. The total 
utility of water is enormous ; but if there are already a 
million gallons available, the marginal utility of an ad- 
ditional gallon is so small that no one is likely to pay any- 
thing for it, and there is no commercial demand in the 
proper sense of the word. 

This is, in substance, the theory of demand set forth by 
Jevons, and carried out in detail by the Austrian school 
of economists. It is of great importance as showing the 
direct connection between utility and price under the 
existing commercial system. It explains more clearly 
than previous theories have done the psychological mo- 
tives which determine the relations between price and de- 
mand. Much of the work of this school, however, seems 
to belong rather to the domain of psychology than of 
economics, and to have a very remote application to the 
practical problems of business and of legislation. 

§ 94. The demand for an article thus depends upon its 
utility as estimated by the consumers, and can be increased 
by lowering the price. To dispose of any given supply 
the holders must make the price low enough to create a 
corresponding demand. 

In the case of perishable goods, the conditions deter- 

of other goods, the theory of reciprocal demand ceases to work smoothly. 
We can no longer say without much reserve that "a market for products is 
products in market." The intervention of the speculator and the varying 
success with which he performs his work, make such a difference in the 
rapidity of exchange that they cannot be ignored in the discussion of price 
variations. 



THE SUPPLY CURVE. 



8i 



mining the supply are comparatively simple. The supply 
of such goods is substantially the same as the stock 
brought to market. If a thousand quarts of strawberries 
come into the hands of the retailers of a certain city 
to day and cannot be kept till to morrow, the price must 
be made low enough to create a demand for the thousand 
quarts, even though such a price be wholly unremunera- 
tive. 



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But if an article be of a more permanent character and 
less liable to deterioration, it will not be necessary to sell 
the whole stock. If the price goes too low, the merchants 
may hold back a part of the stock in the hope of realizing 
higher prices in the future. At a price like ten cents the 
merchants would try to sell every available pound of 
cotton ; at nine cents they would not wish to leave them- 
selves wholly bare, but would reserve a little for future 
contingencies ; at eight cents they would reserve more ; 
while at seven cents or six cents, increasingly large shares 
of the product would be held back. If we assume the 
stock of unsold cotton in New York to be 100,000 bales, 
the supply might be o at five cents, 10,000 at six cents, 
25,000 at seven cents, 40,000 at eight cents, 60,000 at nine 
cents, and 90,000 at ten cents. On this basis we can con- 
struct supply curves, similar to the demand curves in 
Figutes I and 2 ; and can then combine the two curves 
into one figure as in Figure 3 or Figure 4. 



82 COMPETITION. 

§ 95. The market price of an article is determined by 
the intersection of the supply and demand curves.' The 
price for cotton in Figure 3 will be eight cents a pound, 
at which price 40,000 bales will be offered and taken. Any 
price lower than this will produce an excess of demand 
over supply, and the competition of buyers will tend to 
force prices upward ; any price higher than eight cents 
will produce an excess of supply over demand, and the 
competition of sellers will tend to force prices downward. 
Had the price been seven cents we should have had 
buyers for 50,000 bales and sellers for only 25,000 ; had 
it been nine cents, we should have had sellers for 60,000 
bales and buyers for only 30,000. But a price of eight 
cents will just clear the market. There will be no one left 
who wants to sell except at a higher figure, or to buy ex- 
cept at a lower figure. In the general illustration (Fig. 4) 
the price Op is determined by the intersection x of the 
cxxrvQs DD' and SS' . This is the point at which the quan- 
tities demanded and supplied are equal, both being repre- 
sented by the Vmepx. At any lower price, Opj, the demand, 
p^s, exceeds the supply, pjSj, and produces competition 
of buyers; at any higher price. Op., the supply, /^ ^'^j ex- 
ceeds the demand, p^ d^, and produces competition of 
sellers. 

In some markets, like the Berlin Stock Exchange, this 
equalization of supply and demand, instead of being left 
to individual intelligence in competition, is performed by 
a committee, which, after revising all the bids and offer- 
ings for the day, at their various prices, establishes a 
settling price which will secure the maximum number of 
transactions ; a price, that is to say, which leaves the 
smallest difference between the amounts wanted by 
buyers and offered by sellers. 

§ 96. A market price, as thus explained, is a price fixed 

^ The case of a perishable article may be represented by a horizontal su.p- 
ply curve, the supply being a fixed quantity whatever the price offered. 



ITS ADVANTAGES TO THE PUBLIC. 83 

by the self-interest of buyers and sellers, each acting inde- 
pendently — that is, with free competition on both sides. 
The price thus fixed is generally an advantageous one for 
society. This proposition may best be proved by con- 
sidering the various causes which may defeat the action 
of competition and observing the evils which result from 
them. --^ 

The action of free competition may be defeated by 
ignorance, by custom (either with or without the authority 
of law to enforce it), and by combination. 

The bad effects of ignorance hardly need proof. An"^ 
ignorant buyer, unfamiliar with the market rate, is liable 
to be charged a higher price on account of that un- 
familiarity. This results in uncertainty with regard to 
prices, and redounds chiefly to the advantage of the more 
unscrupulous sellers, who will make money by deceiving 
those who deal with them. A one-price system, which is 
a most important element in commercial honesty, is 
secured by intelligent competition and defeated by 
ignorance. 

The disadvantage of relying on custom or combination 
as a means of fixing prices may easily be proved in 
detail. 

§ 97. Suppose that, at the old price, the supply is less 
than the demand, but that custom prevents the buyers 
from competing with one another to force prices up. The 
low price continues as long as the stock lasts. The buyers 
get what there is at the old price, and use it freely. There 
is no apparent motive for them to lessen their consump- 
tion, nor is there any motive for producers to send a 
larger supply to market. After a time the stock of goods 
is used up, and we have distressing scarcity or famine. 
The temporary gain which resulted from the low price is 
more than offset by the suffering due to the total absence 
of the commodity in question. But if the buyers are 
allowed to compete and to force prices up at the very 



84 COMPETITION. 

beginning of the scarcity, the advancing price at once 
operates as a warning to use the article economically. 
This of itself causes the stock to hold out longer. It will 
also generally happen that the advancing prices lead the 
producers to send more goods to the market where higher 
prices prevail ; and that long before the advent of actual 
famine new sources of supply are developed by which the 
severest scarcity is avoided. If this result can be secured 
by a moderate advance in price it is worth many times 
what it costs. For it must be remembered that high 
prices are not so much an evil in themselves, as an indica- 
tion of an evil. If they exist in an open market, it shows 
that certain needs of the community are inadequately 
supplied. It often happens that the higher prices serve 
as a natural cure for the underlying evil, and that the 
effort to force those prices down by custom or law pre- 
vents the evil from curing itself. If custom or law pre- 
vents buyers from paying a competitive price, it soon 
means that some buyers must go without things they 
very much want. 

Where for any reason competition cannot or will not 
act, it is sometimes much better to fix prices by custom 
or law than to leave theni to the results of special bargain- 
ing. Each city has its rates of carriage hire established 
by public ordinance. The medical practitioners of any 
given locality have their customary scale of charges, from 
which professional etiquette forbids them to depart. In 
the case of monopolies, complete or partial, like docks, 
water-works, or railroads, the fees for their use are not in- 
, frequently fixed by legislative authority. But while a 
system of established rates is better than one of special 
bargains, it is worse than one of free competition because 
it does not ensure an adaptation of the quantity of service 
to the needs of the community. The effort to fix railroad 
charges by law results in low rates for those who can get 
the needed transportation facilities ; but it often curtails 



LOSSES FROM COMBINATION: 85 

the construction of new roads and the development of 
train service on old ones to such a degree that the loss to 
those who cannot get their goods to market overbalances 
the gain to those who can. 

§ 98. Suppose, on the other hand, that at the old price 
the supply is in excess of the demand, but that the 
sellers are enabled, either by custom or combination, to 
avoid the effect of competition in forcing prices down. 
The sellers get the old price for what is actually bought : 
but the purchases continue smaller than the supplies, and 
the visible stock increases up to the limit of the mer- 
chants' carrying capacity. One of two things must happen. 
Either a part of the accumulated goods will deteriorate, 
and a useful article be wholly lost to the community ; or 
there will come a time when there is such a glut in the 
market that enormous stocks are sold at a sacrifice which 
causes widespread commercial failure. The acts of the 
French Copper Syndicate of 1888 furnish a good ex- 
ample of this effect of non-competitive prices. This syn- 
dicate succeeded in controlling so large a part of the 
copper of the world that it could apparently fix its 
charges to suit itself; but the high prices interfered de- 
cidedly with the use of copper, and although the increas- 
ing stocks of metal could be carried without deterioration, 
the financial burden ultimately became too great for the 
largest business concerns to bear, and the accumulations 
had to be sold at panic figures. 

Receding prices are, as a rule, the effect of increased 
supply. If they are allowed to work out their natural 
results, they bring about increased use of the article, and 
prevent the large supply from being wasted or allowed to 
deteriorate ; while they also act as a warning to producers 
not to increase the supplies of an article where low prices 
prevail. They may seem like a temporary evil to mer- 
chants and to producers ; but it has been proved over 
and over again that the attempt to stave off this evil 



86 COMPE riTION. 

by interfering with the action of competition makes the 
disaster worse in the end. 

§ 99. Not only does competition tend to utihze the 
aggregate product of the community to advantage, as 
shown in the previous paragraphs ; it also tends, on the 
whole, to make the prices of different articles proportion- 
ate to the expense of producing them. 

Suppose that the market price of iron, as fixed by 
supply and demand, is insufficient to cover the expense 
of producing it. No investor seeking a business opening 
is likely to go into the production of iron, nor will those 
already engaged in the business increase their plant or 
even renew it when it wears out. If at the same time 
there is another article, for instance copper, whose market 
price, as fixed by supply and demand, affords a large 
excess over the expense of production, new investors 
will seek to produce copper, while those already engaged 
in the business will extend their plant and keep it up to 
the highest standard of efficiency. We shall see a dimi- 
nution of the output of iron and an increase of the out- 
put of copper, by a process which, though not generally 
involving actual transfer of capital from one industry to 
another, amounts to the same thing in its effect on the 
community. The permanent supply of iron being dimin- 
ished, while the conditions of demand remain the same, 
the producers will be able to charge a higher price and 
yet dispose of the total product ; while, conversely, the 
permanent supply of copper being increased, the produ- 
cers will be forced to charge a lower price in order to call 
forth a corresponding demand. This process will go on 
until the profit in the production of copper is no greater 
than that in the production of iron. 

§ 100. This adjustment actually takes place among the 
industries of the country as a whole. There is a constant 
supply of free capital and labor seeking investment in 
localities and industries where the higher profits are to be 



NORMAL PRICE. 8/ 

obtained, and not entering those where the profits are 
lower. This process tends to force down the prices of 
products in hnes where they have been unfairly high, 
and to maintain or increase them in those where they 
have been disproportionately low. When this equalizing 
process has taken place, the price is said to be normal. 
A normal price is reached when the product has so 
adjusted itself to the demands of consumers, that the 
market price affords the current rate of profit to the 
producer who enjoys no extraordinary advantage. We 
may contrast market and normal price by saying that a 
market price is one at which, for the moment, the supply 
is equal to the demand ; while a normal price is one at 
which, as long as the existing stage of the arts continues, 
the production is likely to be equal to the consumption. 

Under the modern industrial system there is first a 
temporary adjustment of the demand to the supply by 
the commercial competition of merchants, which lowers 
(or in the converse case raises) the price to make it 
correspond to the marginal utility. This temporary ad- 
justment results in market price. Then there is a more 
permanent, though less accurate and universal, adjust- 
ment of the supply to the demand, by the industrial com- 
petition of investors which lowers (or in the converse 
case raises) the price (and the marginal utility) until it 
becomes proportionate to expense of production. This 
permanent adjustment, as far as it is carried out, results 
in an approximation to normal price. 

§ loi. The adjustment of market price to normal price, 
by changes in the direction of business activity, is a fact 
of cardinal importance.' But it should be understood, 
from the very outset, that the process is a rough and not 
an accurate one. The causes which prevent it from being 
completely carried out may be grouped as follows : 

(i) Some articles are absolutely fixed in quantity,, 
so that the price received has little or no effect on the 



88 COMPE TITION. 

supply. Historic autographs, old coins, or rare postage 
stamps cannot be said to have any normal price, since 
no amount of labor and capital can honestly duplicate 
them, 

(2) A larger number of articles and services are under 
the control of monopohes which strive to limit the supply 
in such a way as to maintain high profits. A railroad may 
charge high rates for a long time without calling a com- 
petitor into being; for business which gives unusual profit 
to one road may afford very inadequate remuneration to 
more than one. As a rule, however, the effect of such 
monopolies is only to retard and not to destroy the forces 
of industrial competition which check exorbitant profits. 
More will be said of this when we come to examine in 
detail the results of modern industrial combination. 

(3) A more universal difificulty in applying the theory 
of normal price arises from the uncertainty attaching to 
the phrase " expense of production " in any given line of 
business. This expense varies with different men, differ- 
ent locations, and different processes. Are we to take the 
average expense of production as the standard of normal 
price, or the expense of the most skilful and well-situated 
producer, or that of the least skilful and well-situated ? 
This will depend upon the line of business. In agricul- 
ture or mining, where the best lands can only meet a part 
of the demand, the community must habitually pay a 
price high enough to induce owners of other lands or 
mines to enter the market ; a price which affords the 
owners of the better lands or mines a surplus profit 
known as rent. In manufacturing, on the other hand, 
when the best plants can increase their output with little 
restriction, so as to be able to supply the whole market, it 
is often the better concerns that fix the price and the worse 
ones have to get on as they can. In general, it involves 
no great error to say that the normal price of any article 
is measured by the expense of producing additional sup- 



UNCERTAINTIES IN ADJUSTMENT. 89 

plies on the part of those who go into business without 
either the advantage of old locations or the disadvantage 
of old methods. 

(4) Another case where the relation between cost and 
price is obscured is seen in bye-products — incidental results 
of industrial processes which have been established for 
some other purpose. If a furnace is engaged in reducing 
pyrites for the sake of the metal which it contains, its 
owners find themselves left in possession of a quantity of 
sulphur from which the metal has been separated. This 
sulphur is a bye-product, not a main object of the busi- 
ness ; its owners are ready to sell it for what they can get 
without attempting to figure the cost. In the manufac- 
ture of illuminating gas, coke is an important bye-product. 
If there is much demand for gas and little demand for 
coke, the latter will be sold by the gas company for 
almost anything it can get. If the demand for coke 
becomes greater, it may come to be treated as a main 
product of the business ; and the effort to determine the 
normal price either of gas or of coke becomes a matter of 
serious doubt. ^ When a large concern like a railroad per- 
forms many kinds of service at the same time, it is often 
quite impossible to say which of its services is to be con- 
sidered as the main object of its existence, and which are 
to be treated as bye-products. Under such circumstances 
the determination of the expense and the normal price of 
any individual piece of work becomes quite an arbitrary 
matter. 

(5) Another difficulty in applying the theory of normal 
price arises from the fact that the process of investment 
is so slow that new inventions may often create a new 
normal price before the original adjustment is complete. 
This is especially the case in industries involving large 
capital. If a factory or a railroad charges too high a 
price, it may be some years before a competitor is found 

^ Mill : " Political Economy," Book iii., ch. xvi. 



90 



COMPETITION. 



to reduce it ; if, on the other hand, too many competitors 
come in, it will be a number of years before they can drop 
out again. Under these circumstances, the price may 
easily remain for a long time either unfairly high or un- 
fairly low, without effective remedy from free competition. 
§ I02. In spite of all these hindrances, the adjustment 
of market price to normal price, though a rough and slow 
process, is a most important one ; and the efforts to ignore 
it, whether on the part of combinations for keeping prices 
too high or legislation for keeping them too low, have 
generally resulted in signal failure. 




§ 103. Let Op (Fig. 5) represent the normal price of 
an article, and px the quantity which will ordinarily be 
produced and consumed at that price. Let Op^ repre- 
sent the maximum price which any buyer is willing to 
pay, so that above this price all permanent demand ceases. 
Let Opi represent the minimum expense of production to 
the most advantageously situated producer, so that below 
this price all permanent supply ceases. The total demand 
for the article will be made up by consumers to whom its 
utility ranges from the price represented by Op^ down to 
that represented by Op. The total supply of the article 
is made up by producers to whom its cost ranges from 
Opr up to Op. At the normal price the amounts of this 
production and consumption will be equal. If the normal 
price of wheat is seventy-five cents, it shows that the 



PRICE AND VALUE. 9 1 

number of consumers to whom the utility of the wheat 
is such that they can afford to give seventy-five cents or 
more just takes up the supply which the producers can 
afford to furnish at seventy-five cents or less. 

Competition by making a one-price system enables the 
consumers whose necessities are greatest to get the article 
for less than they would be willing to pay in an emergency ; 
it also enables the producers whose advantages are greatest 
to charge more than they would be able to accept if hard 
pushed. The gain to the consumers by this process is 
represented by pxp^ ; the gain to the producers by pxpi. 
The former corresponds in a very rough way to the excess 
of utility over price ; the latter corresponds in an equally 
rough way to the excess of price over cost.' 

§ 104. A price is a fact. A value is an estimate of what 
a price ought to be. 

The word value is used in a number of wholly different 
meanings, but this idea of a permanent standard or cause 
of price, as distinguished from a temporary or accidental 
phenomenon, lies at the basis of them all. Sometimes 
value is used in the sense of utility — for instance, when I 
say that an article has a value to me out of all proportion 
to the amount for which I could sell it.'^ Sometimes it 

^ While these curves of normal supply and demand are useful for purposes 
of illustration, they are often misleading, because they are based on assump- 
tions rather than on observations. The use of the supply curve is specially 
open to danger. There is a tendency to identify the area pxpj, with eco- 
nomic rent (ch. ix.). This is an error. Rent is the excess of price received 
over the actual expense of the several producers. The a.rea. pxp^, represents 
an excess of price received over the hypotJietical expense which the better 
producers would incur if the worse ones went out of business. The reduc- 
tion of wages incident to the withdrawal of weaker competitors would make 
the expense in the second case much lower than in the first. 

In the more complicated cases under (2), (4), and (5) in § lor, a normal 
supply curve can hardly be said to exist. 

* An estimate of this kind is sometimes called subjective value. But it is 
better to use the term utility to avoid the confusion which would otherwise 
arise. 



92 COMPE Tl TION. 

means purchasing power in the abstract, as distinct from 
concrete measures of this power ; for instance, when 1 say 
that an article has value, though I do not know just what 
its price may be. Sometimes it means purchasing power 
measured in commodities instead of in money. In coun- 
tries with a paper currency there is frequent occasion for 
using the word in this sense. If the currency is doubled 
by act of the legislature, the prices of goods measured in 
this currency will tend to double also; but we are justi- 
fied in saying that there is no increase of real value corre- 
sponding to this change in nominal price. Sometimes the 
term value means average probable price. If I say that 
a certain railroad stock is selling below its true value, I 
simply mean that in the long run it is, in my opinion, 
likely to command a higher price than it does now. Finally 
the word value often means 2, proper and legitimate price, 
as distinct from an unfair or extortionate one. The last 
is much the commonest and most important sense of the 
word in commercial usage, and there seems to be no good 
reason against our adopting it. In this sense, the sub- 
stantive value corresponds exactly to the adjective worth. 
If we say that a man is charging a higher price for an 
article than it is worth, we mean that he is putting the 
buyer at an unfair disadvantage. 

The price of an article or service, in the ordinary com- 
mercial sense, is the amount of money which is paid, 
asked, or offered for it. The value of an article or service 
is the amount of money which may properly be paid, 
asked, or offered for it. A theory of price puts us in a 
position to explain the transactions of commercial life. 
A theory of value undertakes to pass judgment upon 
their advisability or their morality. 

§ 105. Value being essentially an ethical term, we may 
have as many different theories of value as there are differ- 
ent views of business ethics. But these views fall under two 
main heads : the commercial or competitive theory, which 



TWO THEORIES OF VALUE. 93 

bases value upon what the buyer is wilHng and able to offer 
for an article ; and the socialistic theory,, which bases it 
upon what the article has cost the seller in the way of toil 
and sacrifice. When we have grasped this ethical charac- 
ter of the controversy between the commercial and social- 
istic theories, we seize more clearly upon the points which 
are essential to the adjudication of that controversy. The 
question between the two parties is not primarily one of 
fact, but of advisability ; not what necessarily determines 
value, but what kind of a price we shall stamp with our 
approval by calling it a value. The commercial theory is 
that the value of an article is the price which it would 
command under a system of free and open competition, as 
distinct from one which is the result of special bargaining 
or fraudulent concealment.' In this sense, the market 
price represents the temporary value of an article, and the 
normal price represents its permanent value. The advo- 
cates of the commercial theory hold that the competitive 
system serves the economic interests of society so well, 
that the first rule of business morals is to conform thereto ; 
and that the demands of commercial justice are generally 
satisfied by a schedule of prices made under the influence 
of fair and open competition, as allowed and encouraged 
by the common law of England and America. 

§ 106. From this view of commercial justice the social- 
istic theory dissents. The advocates of the socialistic 
theory say that, whatever the effects of competition may 
be upon society as a whole, its relative effects upon differ- 
ent members of society are extremely unfair. Many of 
those who do the most disagreeable work have the least 
enjoyment to show for it. This the socialists hold to be 
contrary to the principles of popular government, or of 
enlightened government of any kind. In criticising the 
results of free competition, they emphasize the fact that 
the adjustment of price to expense of production is 

' The " Austrian " theory of value is nothing more than the commercial 
theory carried out to its logical conclusion. 



94 COMPETITION. 

extremely imperfect; and they add that the expense of 
production, as measured in money, is a very different 
thing from the cost of production, measured in the labors 
and sacrifices of the producer. They think that the 
increased extent of modern competition intensifies this 
divergence between cost and expense, because it brings in 
labor of different grades of efficiency to supply the same 
market, and forces men to accept the same price under 
increasingly different conditions of supply. They hold 
that the rendering of labor constitutes the only just 
ground for charging prices and the only just basis for esti- 
mating values. This basis they believe to be habitually 
ignored or defied in the processes of modern trade. They 
think that trade involves an effort to buy goods for less 
than their value and to sell them for more than their 
value ; that the profits of traders and capitalists of every 
kind represent money unfairly extorted from consumers 
or withheld from producers ; and that society must employ 
some organized means to prevent this extortion, and not 
let the trader take advantage of his power to fix prices to 
suit himself. 

§ 107. That there is an obvious inequality in the re- 
turns under the existing commercial system of payment 
may readily be granted. None but the blindest optimist 
will deny that many of the men who do the most 
disagreeable work have the least comfort to show for 
it. The socialists are justified in asserting that there is 
an inconsistency between our political doctrine of equal 
rights to the pursuit of happiness for everybody, and the 
facts of the industrial world, as we see them about us. 
But when they come to formulate a positive theory or 
standard of value, they give us something which, if 
carried into practice, would be inconsistent, to a far greater 
degree than is the existing system, with the political 
doctrines of a free commonwealth and with the chances 
of happiness for its citizens. 



THE SOCIALISTIC THEORY. 95 

If we attempt to reward every one according to his 
labor, we are at once brought face to face with the danger 
that people will make the wrong things. Give free choice 
of occupation under this system, and we should at once 
have an overplus of painters and musicians, with a defi- 
ciency of farmers and mechanics. It would be necessacy 
for the government authorities to regulate the number 
who should engage in each occupation — a method which 
would be subject to the gravest industrial and political 
dangers. 

The free choice of employment under the modern com- 
petitive system, while it doubtless increases the inequali- 
ties of return within the same trade, diminishes the 
inequalities of return between different trades, and gives 
able men in underpaid industries or localities a chance to 
better their condition by a change. If the numbers em- 
ployed in different trades were regulated by public 
authority, the chances for such movement would be much 
reduced. The possibilities which, under the commercial 
system, are open to a man of real ability, even under 
unfavorable circumstances, would under the socialistic 
system be confined to those who could command excep- 
tional political influence. 

§ 108. There is another even greater danger inherent 
in the socialistic theory of value. It takes away the pre- 
mium for efficiency. It makes a man's claims for reward 
depend not upon what he has done for others, but upon 
how he has occupied himself. Time wasted counts for as 
much as time spent. This is a difficulty which the leaders 
of socialistic thought have in vain tried to meet. To say, 
as Marx does, that value depends on the quantity of 
socially necessary labor represented by an article, intro- 
duces two conflicting standards. Social necessity is a 
quality which varies in degree — a fact whose consequences 
Marx fails to take into account. How shall we rate an 
article which embodies a little labor Avith a great degree 



g6 COMPETITION. 

of social necessity, as compared with one which embodies 
a great deal of labor with a less degree of social neces- 
sity ? If we deem the producers of the former article 
worthy of the higher award, we reintroduce the com- 
mercial standard of value under a new guise. But if 
we reward the producers of the article which represents 
much labor and little social necessity, we take away all 
inducement for the efificient or wise application of labor 
and capital. The commercial theory of value has the 
inestimable advantage of giving a man a motive for effi- 
cient work by the best methods. Success and power are 
made dependent on doing as much as you can, with 
the least possible waste. It is by this process that capital 
is accumulated and fortunes made. The socialists are 
wrong in regarding trade as robbery. Individual instances 
there may be which lend color to this idea ; but those 
instances are far from being the rule. If a man obtains 
a large income, in nine cases out of ten it is because 
he furnishes something which society wants ; if this 
income leaves him a large margin of profit, it is because he 
has known hoAV to economize social force in doing the 
work. The theory of value and of commercial justice 
which puts a premium on work of this kind is far better 
for the community than that which, in its pursuit of dis- 
tributive equity, is ready to sacrifice collective efficiency 
and economy. 



CHAPTER IV. 

SPECULATION. 

Gambling — Insurance — Commercial Speculation — Legitimate and Illegiti- 
mate Transactions— Industrial Speculation — Functions of the Capitalist. 

§ 109. We have thus far studied some of the principles 
which regulate compensation for goods and services. We 
have now to deal with those which regulate compensation 
for risk. 

The first case to be considered is that of gambling. HA 
agrees to pay.^ a dollar in the event that a coin, tossed into- 
the air, turns up heads, and B agrees to pay A the same 
amount in the other event, we have a transaction which 
gives each party an equitable compensation for the risk 
involved. Yet the moral sense of the community disap- 
proves of dealings of this kind, and the law does what it 
can to discourage them. The courts will not enforce such 
contracts, and the public authorities usually try to stop 
people who make a living in this way. The more en- 
lightened the community, the more decided is the moral 
disapproval, and the more persistent are the attempts to 
enforce legal prohibitions of lotteries, policy shops, and 
book-making establishments. 

§ 1 10. We saw in the last chapter that successive ex- 
penditures on the part of any individual were accompanied 
by diminishing additions to his enjoyment. The first 
hundred dollars of a man's income represents a difference 
between life and death. The second hundred is a matter 
of less absolute necessity. The third represents an in- 

97 



98 SPECULA TION. 

crease of comfort which is still great, but not equally in- 
dispensable. When it comes to the tenth hundred it is a 
question of enhanced enjoyment ; at the twentieth, it per- 
haps becomes a matter of luxuries only. In general, we 
have a diminishing scale of utility for each additional 
hundred dollars as the income itself gets larger and 
larger. 

If a man with an income of $1000 a year bets $500 on 
an event which is in equal degree likely to happen or not 
to happen, and then wins, he finds himself with $1500 in- 
stead of $1000. If he loses, he has $500 instead of $1000. 
His loss of comfort and efficiency in the latter case far 
outweighs his gain in the former. A risk which appears 
equitable when measured in dollars and cents, is very in- 
equitable when measured in the comforts which that man 
can command for himself and his family. He is risking 
the loss of a larger amount of comfort, for an even chance 
of gaining a smaller amount. 

When a man stakes a large percentage of his income in 
this way, it is easy to see that gaming is folly. The apol- 
ogists for gambling say that they risk such small propor- 
tions of their income, that the difference in utility between 
equal money gains or losses is very slight, and that the 
pleasure of the excitement in the hazard outweighs any 
such trifling difference. This is in many instances true ; 
but it is also true that in a large number of instances 
people do not know when to stop ; that under the stress 
of excitement they risk very considerable proportions of 
their money (not to speak of cases where they risk other 
people's money also) ; that the losses represent losses of 
comfort and self-respect, while the gains are spent in 
luxury or carousal. Under these circumstances, the pub- 
lic is fully warranted in holding that gambling contracts 
are against public policy. It is a public misfortune to 
have people hazard their fortunes in this way ; and the 
man who makes a living by persuading other men to take 



INSURANCE. 



99 



such risks on terms advantageous to himself, whether in 
gaming, horse-racing, or lotteries, is worse than a parasite 
on society. 

§ III. Let us now contrast the workings of insurance. 
In this case also the contract is a wager. A house owner 
pays an insurance company fifty dollars, in return for 
which he is to receive five thousand dollars in case his 
house burns down within a specified time ; just as he 
might pay a bookmaker fifty dollars and receive five 
thousand in case a specified horse wins a race. But the 
motives and effects in the two cases are wholly different. 
The man who wins in betting on horses secures an addi- 
tion to his income which means increased luxury ; the 
man who has insured a house that burns down prevents 
the distress to his family consequent upon the loss of a 
home.' In like manner, the man who has insured his life 
makes small annual payments at a time when he can do so 
without encroaching on the comfort of his family ; thereby 
assuring to that family, in the event of his death, a pay- 
ment of money at a time when the loss of the earning 
power of its head might otherwise mean want and destitu- 
tion. Insurance puts money where it is needed, instead 
of putting it where it is not needed ; where it has the 
highest utility to the individual and to society, instead of 
the lowest ; where the possibility of securing it, instead 
of being a means of demoralizing excitement, becomes a 
source of security and of industrial efficiency. Hence the 
insurance company in protecting the individual insurer 
against losses to himself and his family from fire, accident, 
or death, is rendering a public service ; and the profits of 
such a company, unlike those of the bookmaker or the 

^ If a man insures a house in which he has no interest, or insures his own 
house beyond its real value, the transaction comes very close to gambling 
and is discountenanced both by the insurance companies and the law ; not 
simply or primarily because it is a gambling transaction, but because it leads 
to fraud and arson. 



lOO SPECULA TION. 

lottery, are honestly earned by an actual contribution to 
the public wealth. 

§ 112. Commercial speculation is sometimes analogous 
to insurance, and sometimes to gambling. In the former 
case it is said to be legitimate, in the latter it is said 
to be illegitimate. But the legitimate and illegitimate 
transactions are so much alike in their form, and so inex- 
tricably mingled in practice, that it is often extremely 
hard to draw the line between them. 
I § 1 13. A large speculative element is involved in trade of 
every kind. The trader seeks to buy articles at as low a 
price as he can and to sell them at a higher price. He may 
do this either by buying them in a market where they are 
cheap and selling them in a market where they are dearer ; 
or by buying them at a time when they are cheap and sell- 
ing them at a time when they are dearer. The difference 
between his buying and selling prices represents his profit 
on the transaction. The uncertainty attaching to the 
amount of such profit makes the operation a speculative 
one. There is a serious risk of loss, which the trader 
assumes for the sake of a possible gain. Unless we can 
prove that the gains are honestly earned by some service 
to society, we shall be forced to regard them as little 
better than book-makers' profits. 

Those who hold the socialistic theory of value regard 
trade as a dangerous occupation, which affords almost 
irresistible temptations to dishonesty. Believing, as they 
do, that the value or just price of an article depends on 
the labor embodied in it, they see in trade a constant 
effort to buy articles for less than their value and to sell 
them for more than their value ; an effort in which the 
trader's superior shrewdness often enables him to cheat 
both producer and consumer. In that form of trade where 
articles are bought in one place and sold in another, they 
admit that the trader may do a necessary work of distribu- 
tion which increases the value or just price of the goods 



SERVICES RENDERED BY TRADE. 10 1 

in question, so that a part of the profit of this form of 
trade is legitimate. But in that form of trade where 
articles are bought at one time and sold at another, they 
deny that there is any service rendered which increases 
the value of the goods, and they hold that all profit ob- 
tained by this means is unjust and extortionate. In 
mediaeval times, when the socialistic theory of value was 
generally accepted, all trade was regarded with a suspicious 
eye : and the attempt to buy an article when it was cheap, 
with a view to selling it when it became dear, was visited 
with the severest penalties. -v 

§ 114. But those who hold the commercial theory of 
value believe that trade renders a service to society, inde- ^ 
pendent of the labor of distribution ; and that this service 
is of essentially the same character, whether the sale be 
made in a different market or in the same market. They 
hold that the work of the trader, in acquiring goods when 
they are cheap and parting with them when they are dear, 
results in an increase of their utility to the public. If an 
article is unusually cheap, it means that the supply is 
unusually great and the utility of additions to the supply 
less than it ordinarily is. If it is unusually dear, it means 
that the supply is unusually small, and the utility of 
additions to the supply greater than it ordinarily is. 
If wheat stands at 50 cents a bushel, the need for addi- 
tional wheat is small; if it stands at $1.00 a bushel, the 
need for additional wheat is great. The man who with- 
draws wheat from the market in the former case and is 
thus enabled to add it to the supply in the latter, serves 
the wants of society. Nor is it true, as might at first sight 
appear, that he is enabled to appropriate to himself by 
the higher price the whole benefit of the increased utility. 
If any considerable quantity of wheat is bought by the 
traders at the lower figure for future sale, it will increase 
the demand and make the present price higher than 50 
cents ; while the supply thus made available when wheat 



I02 



SPECULA TION. 



becomes scarce will prevent the' future price from reach- 
ing $1.00. 

§ 115. Let DD' (Fig. 6.) be the demand curve for 



zoooo 
laooo 

16000 
It-OOO 
IZOOO 
10000 



<? 


^ 






\ 


r/n /s 






\ 


■ '7- 








\ 












\ 














\ 




' 












P 



SO 60 70 SO SO 100 



4J 



wheat in a certain market where 10,000 bushels a week 
would be taken at a dollar a bushel, but where 20,000 
bushels a week could not be disposed of except by redu- 
cing the price to fifty cents. If a single trader stores away 
a few bushels of wheat when it is plenty, and sells it when 
it is scarce, he hardly affects the price to the producer or 
the consumer, and can in that case realize nearly the 
whole gain for himself. But his success will teach others 
to follow his example. Now if he and other traders store 
away 2,000 bushels a week in time of plenty, they so re- 
duce the amount for immediate consumption that the 
ruling price at that time is sixty cents instead of fifty ; 
while by selling this same wheat in time of scarcity, they 
increase the supply so that the ruling price only goes up 
to about ninety cents. If the traders withdraw 4,000 
bushels a week in times of plenty, and thus provide an 
increased supply for times of scarcity, it is probable that 
they will have to pay seventy cents for what they buy, 
and only get eighty cents when they sell it— a difference 
which may little more than pay them for the cost of 
carrying the wheat. The more fully the traders seek to 
take advantage of differences in price, the narrower is the 



THE PROFITS OF TRADE. 



103 



margin they can realize for themselves. In general, if a 
supply Oqj (Fig. 7) will only command a price Opj, while 



\x 






^. 



Pi Pi Pi Pi- Ps Pi 



a supply Oq(, will command a price Op^, it means that 
the need of increased supplies in the latter case is greater 
than in the former, and that any man supplying that need 
renders society a corresponding service. If a trader with- 
draws a small quantity q^q^ in time of plenty and sells it in 
time of scarcity, the extremes of price variation are Op^ 
and Op^, and the trader is able to realize the difference/^/j.. 
But if the traders reserve a larger quantity ^^^^, and corre- 
spondingly increase the supply from Oq(, to Oq^ in time 
of scarcity, the extremes of price will be Op^ and Op^. 
This leaves only a small margin p.p^ per bushel for the 
traders (instead oi p2p^, as in the former case), and leaves 
a much larger part of the gain to society for the benefit 
of producers and consumers. Anything which tends to ] 
prevent fluctuation in price renders a service in putting 
goods where they are needed — a service which has an 
effect on the public wealth far greater than can be 
measured by any of its effects on the private wealth of 
individuals. 

§ 116. If the traders can compare accurately the rela- 
tions of supply and demand in different markets, they 
will all try to put the supply where it is most needed, as 
long as the difference in price is likely to cover the cost 



I04 SPECULA TIOM. 

of transfer. The profits from trade of this kind are small, 
and relatively sure. But if no such accurate comparison 
can be made, the trader's possible profits are much larger, 
while the risks and uncertainties are at the same time 
greater. The transaction in this case becomes a more 
speculative one. 

§ 117. Down to the present century, a large part of the 
speculative profits were made by taking advantage of dif- 
ferences of price in different places — chiefly in connection 
with foreign trade. The means of communication and 
transport were so defective that there was often a great 
scarcity of an article in one region and an abundance of 
the same article in another. The shipowners who moved 
the article from the latter place to the former had a chance 
of enormous profits. But the business was also attended 
with great risks. Transportation was far less safe, either 
from the elements or from human violence, than it is to- 
day. There was no telegraph, no good postal service, no 
efficient protection from pirates by sea or highway rob- 
bers by land. All these causes combined to render the 
arrival of goods so uncertain that the very wages of the 
seamen were made contingent upon the safe delivery of 
the cargo, and the whole body of sailors thus became 
participants in the speculation. 

The nineteenth century has witnessed a change in these 
respects. Improved means of communication have greatly 
lessened the differences in price in different markets. It 
is no longer possible to have a glut of wheat in Chicago 
and a scarcity in Liverpool. The modern post-ofifice and 
the telegraph furnish prompt information of what is going 
on all over the world, and enable merchants to know where 
goods are most needed. The steamship and the railroad 
furnish a quick and safe means of placing the goods where 
they will meet such needs as may arise. The difference 
of price of any staple article in two large wholesale 
markets will not generally be much greater than the cost 



CONTRACTS FOR FUTURE DELIVERY. 105 

of transportation from one to the other. So moderate 
have the profits from this source become, that the busi- 
ness of those who try to secure them is now known as 
arbitrage rather than speculation. Only in the trade with 
barbarous or half-civilized races does foreign commerce 
retain its character as an extra-hazardous business. 

§ 118. The speculator of to-day makes his money 
chiefly by taking advantage of differences of price 
between different times, rather than between different 
markets. It is not so much the difference in the 
price of wheat in Chicago and in Liverpool which fur- 
nishes the source of his profits, as the difference between 
its price in Chicago this month and next month. If the 
speculator foresees a rise, he buys wheat to-day with 
the hope of selling at an advance. If he foresees a 
fall, he contracts to make future deliveries at to-day's 
prices, in the hope that he can secure the means of filling 
those contracts at rates low enough to leave him a profit. 
This is the type of transaction which forms the bulk of 
the business on all the leading exchanges of the world. 

§ 119, When such speculation anticipates an actual 
demand, it is of great service to the community, The 
long time which elapses between production and consump- 
tion, between contracts and their fulfilment, makes it 
extremely important to have responsible men to antici- 
pate the wants of the market and take the risks on their 
own shoulders. If I wish to build a house, I ask a builder 
to give me an estimate of the cost.' He in turn goes to 
dealers in lumber and other materials and asks them to 
tell at what price they will deliver him the goods when he 
wants them. In this way he knows approximately what 
it will cost to build the house. The lumber dealer prob- 
ably contracts to deliver lumber which is not now in his 
possession. But if he understands his business he knows 
more accurately than any one else what its future price is 
likely to be. He habitually makes a profit by his superior 



1 06 SPECULA TION. 

knowledge ; but this profit is far less than the loss which 
would be involved if every builder, at the time of making 
a contract, had to buy all the lumber he was going to 
want six months hence, leaving his capital (and the com- 
munity's capital) unproductive for that length of time, 
besides being subject to the dangers of loss by fire. 

Nor does this case illustrate the full measure of service 
which legitimate speculation is able to render the com- 
munity. Suppose that the cotton crop of this year is an 
unusually small one. The price will go up, the amount of 
manufacture lessen. But the cotton brokers foresee that 
next year's crop will be larger. They therefore contract 
to make future deliveries at lower rates. The manufac- 
turers do not need to buy raw material in advance of 
their actual wants. They use up the whole old stock just 
as the new crop comes in ; and the mercantile community 
gradually accumulates other reserves from this large crop 
-which may become available for use in a year of scarcity. 
The effect of such speculation is to equalize the supply 
of cotton in different years, and to render its price 
comparatively steady. More steady price makes larger 
consumption and manufacture for consumption ; it there- 
fore tends to increase the total quantity demanded and 
to benefit producers also. If we compare the prices of 
the present day with those prior to the development 
of speculative activity, we find that the margin between 
amounts paid to producers and those charged to consumers 
is much narrower now than it was before. Part of this 
difference is due to cheap transportation ; but a part 
is due to the action of speculators in minimizing the effect 
of variations in production upon prices paid to the 
producer. 

§ 120. This is the effect of legitimate speculation — antici- 
pating movements of supply and demand and taking fair 
risks. Unfortunately there is a mass of speculation which 
is not legitimate — which is either pure gambling or some- 



MARGINS. 



107 



thing worse. If a man goes into the purchase of grain or 
cotton, not because he foresees that it will be wanted, but 
for the excitement of the wager, he is doing the same 
kind of business as the man who bets on a horse-race 
or on cards. The amount of these gambling transactions 
veiled under the forms of commerce has become very 
large. In many cases it has assumed the proportions of a 
public evil. 

The sales of certain commercial staples, such as wheat, 
cotton, or petroleum, in the New York market are in 
some years fifty times as great as the actual deliveries. 
Of the transactions in stocks, perhaps an equally small 
proportion represent purchases for investment. A large 
part of such sales and purchases are made on margins ; 
tfee buyer not paying or intending to pay the full amount, 
but depositing with his broker a sufficient sum to secure 
the latter from loss, and receiving or paying at the com- 
pletion of the transaction an amount corresponding to the 
change in price of the commodity purchased. The nar- 
rower the margin, the greater is the chance of gain or loss 
in proportion to the capital invested, and the higher are 
the stakes to the gambler on either side. 

Here, as elsewhere, high stakes constitute a temptation 
to unfair play. If the outside public, as frequently hap- 
pens, has bought securities or produce in the ill-grounded 
hope of a rise in price, the professional operators will 
speculate for a fall and try to ensure its advent by 
spreading false reports of every kind. If, on the other 
hand, a large number of operators have made contracts 
to deliver securities or produce which they do not 
possess, a few men with large capital will often try to lock 
up the whole available supply of such commodities, and 
compel those who have made the contracts to purchase 
the means of filling them at an exorbitant figure. Such 
an operation is known as a corner ; and its success is made 
possible by the number of speculative contracts which 



I08 SPECULA TION. 

must be filled within a limited period of time. The man 
who thus attempts to manipulate the market, lowering 
prices by false reports or raising them by factitious 
scarcity, is doing the same kind of business as a man who 
" pulls " horses or stacks cards. In fact, he is doing 
worse ; for the men who suffer from false running or 
from card sharping are those who voluntarily go into the 
business of betting ; while the knavish speculator may 
hurt to some degree not only other speculators, but also 
producers and consumers — the producers by his deceit, 
the consumers by his combinations to raise prices. The 
direct harm done to producers and consumers by these 
means is very likely much less than is generally sup- 
posed ; in the first place, because successful corners are 
relatively few, and, in the second place, because the profits 
of one group of speculators are for the most part made at 
the expense of other groups. But the indirect harm to 
business methods and business morals is incalculable. 
•~^ § 121. So great has been the extent of this evil that 
many have desired to see an entire prohibition of con- 
tracts for future delivery of things which a man does not 
possess at the time ; but this is obviously out of the 
question. It would prevent operations like those of the 
cotton broker or the lumber merchant, which economize 
the capital of the community and have become a neces- 
sary feature in modern business life. It would be at- 
tended by great and disastrous irregularity in prices. 
Any legislation of this kind, in order to be successful, 
must be so contrived as to affect the gambling trans- 
actions and leave the legitimate ones comparatively 
untouched. 

§ 122. It is extremely difficult to make this distinction 
by law. It cannot be based on the subject-matter of the 
transaction. The illegitimate speculations deal with the 
same articles as the legitimate ones. Sometimes when 
public indignation has been roused by the operation of 



EFFECT OF RESTRICTIONS. 109 

brokers in certain lines there have been attempts made to 
stop all transactions in those lines ; but they have usually 
proved disastrous. In the year 1864, the large issue of 
paper currency had driven gold out of circulation and 
caused it to be bought and sold as a commodity. Much 
of it was in the hands of speculators. When its price 
rose more than one hundred per cent, it was supposed 
by the public that a part of this increase was due to the 
operations of these speculators. All gold speculation was 
therefore prohibited by statute. Under the excitement 
of public opinion in time of war this statute was enforced 
to a far greater degree than could have been done in 
peace. The effect was precisely the opposite of what 
had been anticipated. Every man who was engaged in 
foreign trade had to provide security for being able to 
make gold payments in the immediate future, if called 
upon to do so. Being prevented from dealing with 
speculators, he now had to accumulate a reserve of his 
own. This caused an increased demand for gold at a 
time when it was unusually difficult to maintain an 
adequate supply. Under two weeks' operation of the 
act, the price of a hundred gold dollars rose from about 
two hundred paper dollars to very nearly three hundred. 
So obvious was its evil effect that it was hurriedly re- 
pealed as a means of preventing further commercial dis- 
asters. Again, in the early part of 1866 there was a rise 
in the price of gold, which was attributed by public 
opinion to the speculators. Their machinations were 
defeated, not by legislation, but by the issue to the 
market of a part of the gold lying in the Treasury of the 
United States. For the moment the price of gold fell, 
and people rejoiced that the plans of the speculators had 
been defeated. But a short time* later, when the war 
between Prussia and Austria caused a demand for gold in 
Europe, there were large exports of the metal, and its 
price rose by natural causes. The United States was 



no SPECULATION. 

obliged to buy back, at a decided loss, a part of the gold 
which the Treasury had so unwisely issued. It turned out 
in the end that the operations of the speculators in an- 
ticipating the wants of the future would have prevented a 
loss to the country, and that the attempt of the Treasury 
to defeat those operations was attended with expense 
both to the government and to the mercantile com- 
munity. 

§ 123. Nor can the distinction be based on the form of 
the transaction. In England the law attempts to enforce 
a requirement of actual delivery. But in the majority of 
speculative commodities delivery is made, not by turning 
over the product itself, but by a warehouse receipt. The 
physical delivery of a thousand bales of cotton every time 
the right to that cotton changed hands would involve an 
absurd waste of power. A warrant is all which can be 
delivered. But a warrant for delivery can be passed as 
many times as the exigencies of the law require. In- 
stances are on record where such warrants have changed 
hands fifty times before reaching the actual consumer. 
The spirit of the law requiring delivery can thus be 
evaded. It is almost as easy to evade laws which pro- 
hibit the settlement of transactions by the payment of 
margins — transactions where there is no deliver}' of 
goods, but a payment of money from one party to the 
other, based on a change in value of the goods. Where it 
can be proved that this was the original intent of the 
transaction it is easy to stamp it as gambling ; but a very 
slight change in form is sufificient to enable such opera- 
tions to be continued under a nominal comphance with 
the letter of the law and in open opposition to its spirit. 

§ 124. The difference between legitimate speculation 
and gambhng lies neither in the subject-matter nor in the 
form of the transaction, but in its intent and purpose. 
Legitimate speculation involves anticipation of the needs 
of the market and a power to assume risks in making con- 



LEGITIMATE METHODS. Ill 

tracts to meet these needs. A failure to fulfil either of 
these requirements makes the operation an undesirable 
one for the public to tolerate. If a man, instead of / 
anticipating the needs of the market, attempts to manipu- 
late that market by combinations and corners, any gain 
that he makes is usually at the expense of the public. A 
stricter enforcement of laws with regard to conspiracy, 
and, what is more to the purpose, a better understanding 
by the business community of the distinction between 
what is good and bad public policy in this matter, would 
do a great deal to remedy some of the worst evils with 
which speculation is attended. Of even more importance 
is the requirement that a speculator should actually take 
the risks which he pretends to take. He should speculate 
with his own capital, and not with other people's. If a 
man speculates with his own capital the transaction is apt 
to be a legitimate one ; if he speculates with the capital 
of the community it is almost always pure gambling, 
whether he intends it to be so or not. In the first place, a 
requirement that a man should speculate with his own 
capital makes him more cautious. He is not likely to 
take risks unless there is a reasonable chance of winning. 
Moreover, the man who has the capital is likely to be a 
fairly good judge of such risks. If he has saved it by his 
own exertions it shows that he possesses industry and 
prudence. If he has inherited it, there is some probability 
that he has inherited these same qualities, and an even 
higher probability that he has had the advantages of a 
commercial education. If in spite of these advantages he 
makes mistakes and fails to provide the public with what 
it actually needs, he is unable to repeat his experiments. 
His bad judgment has eliminated him from the ranks of 
speculators, while his successful rival, by the very fact of 
his success, is able to repeat his operations on a larger 
scale in the immediate future. As long as the require- 
ment that a man should speculate with his own capital is 



1 1 2 SPECULA TION. 

rigidly enforced, there is a progressive elimination of the 
unfit and selection of the competent. The longer this 
process goes on the greater is the probability that the 
wants of the market will be anticipated and that the work 
of speculation will prove one of equalization : putting pro- 
ducts where they are needed, increasing their utility to 
the community, and insuring it against fluctuations in 
their supply. 

§ 125. But if a man can speculate on borrowed capital 
and have the credit of the community placed at his dis- 
posal for this purpose, the result is likely to be quite 
different. The chance of using other people's money 
puts a premium on reckless gambling operations. It 
allows the speculator to take indefinite chances in risking 
what does not belong to him, with the assurance of 
increasing his own power and influence if such gambling 
is successful and losing nothing if it fails. We expose 
ourselves to this danger by loose systems of credit, by 
loose bankruptcy laws, and above all, by loose commercial 
ethics, under which the public opinion of the business 
community not only tolerates but admires success in 
operations of this kind. Instead of treating speculation 
on borrowed capital as a fraud on the community and 
denouncing it as such, we offer mild criticism in case of 
failure and unqualified admiration in case of success. 
There is|"1To more serious danger to the present commer- 
cial system than that which arises from the easy-going 
tolerance of abuses like this. As long as this state of 
mind continues no law to check the abuses of speculation 
can be made effective. With a reform in public senti- 
ment, little or no law would be needed. 

§ 126. It is not only in commercial matters, but also in 
industrial ones that the speculator exercises a dominant 
influence. He controls production as well as trade. 
What the merchant does when he buys products in the 
hope of selling them at an advanced price, the manufac- 



INDUSTRIAL RISKS. II3 

turer is doing when he buys labor in the hope of selhng the 
results of that labor at a profit. The whole wage system 
is one under which the employers of the country part 
with property rights to-day in the hope of securing larger 
property rights in the future. Part of their prosperity 
arises from skill in organizing labor ; part, and usually a 
larger part, arises from skill in foreseeing the wants of the 
market. The success or failure of a man engaged in 
manufacturing, in transportation, or in agriculture depends 
more upon his skill as a prophet than upon his industry 
as a producer. When Henry George says, " It is never 
as an employer of labor that any producer needs capital. 
When he does need capital it is because he is not only an 
employer of labor, but a merchant or speculator in or an 
accumulator of the products of labor," he has described a 
salient feature of the modern industrial system. But 
when he goes on to assume that this state of things is an 
unnecessary and arbitrary one, he fails to take the facts 
of industrial history into account. We have put the em- 
ployment of labor into the hands of those who are able 
and ready to speculate in the products of labor, because 
this method has on the whole proved the best for the 
community. The industrial development of the last three 
or four hundred years, rightly interpreted, is an account 
of the reasons which have led society to put the control 
of its industry into the hands of a body of speculative 
investors. 

§ 127. All productive industry involves a certain amount 
of risk. Whenever time elapses between the application 
of labor and the completion of the product of labor in a 
form available for actual enjoyment, there is an advance 
of capital to the producers for the sake of a remote and 
generally somewhat unknown result. In the building of 
a factory or a railroad a great deal of food is consumed. 
Whether the product of the labor thus applied will be as 
useful to the community as the food which was consumed 



I 1 4 SPECULA TION. 

by those who have produced it, is always somewhat un- 
certain. The more remote the result, the greater is the 
uncertainty. George's own chosen illustration refutes his 
assumption that labor necessarily replaces the capital 
which it consumes. " Here is a blacksmith at his forge 
making picks ; clearly he is making capital — adding picks 
to his employer's capital, before he draws money from it 
in wages. Here is a machinist or boiler-maker working 
on the keel-plates of a Great Eastern. Is he not also just 
as clearly creating value — making capital ? " No. The 
men who worked on the keel-plates of the Great Eastern 
were clearly not creating value. The Great Eastern was 
an ill-designed boat that never rendered the services ex- 
pected. It was a case of misdirected labor. Had the 
machinists and boiler-makers who worked on the Great 
Eastern been compelled to content themselves with the 
price which the result of their labor ultimately com- 
manded, they would have starved before it was half done. 
In the simple processes like those of the blacksmith the 
result is so near at hand and the needs of the consumers 
so well known, that the chance of conspicuous failure to 
replace the public capital consumed is very small indeed ; 
in processes like those of steamship or railroad building 
the danger is indefinitely larger. The more remote the 
consumers in time or place, the greater is the uncertainty 
and the more speculative the whole transaction. 

§ 128. Especially prominent does this uncertainty be- 
come in the application of any new process or the de- 
velopment of any new locality. Under old conditions, 
experience has proved what products are wanted and how 
labor can be economically applied ; but every new inven- 
tion or new settlement involves a multitude of new and 
unknown conditions. Scientific experts cannot predict 
the success or failure of a commercial enterprise ; it re- 
quires the test of actual experience. Every business man 
will tell you of many projects that look well on paper 



INDUSTRIAL PROGRESS. II5 

but fail to work in practice. A large proportion of the 
capital embarked in such enterprises is lost. A large pro- 
portion of the food consumed by the laborers engaged in 
such undertakings is virtually wasted. 

§ 129. Are we then to forego all chance of such prog- 
ress ? No. The gain to the community as a whole, from 
one successful experiment, may outweigh the loss from 
ten unsuccessful ones. The conservative nation that 
never changes its methods avoids a great many losses, 
but it fails to make the conspicuous gains which consti- 
tute modern industrial civilization. The problem of in- 
dustrial growth can be solved only by encouraging enough 
experiments to secure progress without encouraging so 
many as to destroy the whole accumulated capital of the 
community. We have tried to accomplish the former 
object by giving individual possessors of capital the chance 
of realizing large profits in case of success ; and to protect 
ourselves against the latter danger by insisting, at least in 
theory, that a man shall make these experiments at his 
own expense. If everybody were free to undertake them, 
whether he had proved his fitness by accumulating private 
capital or not, the food supply of the community would 
probably soon run short. If nobody were allowed to 
make them until the whole community was ready to vote 
for their adoption, they would be indefinitely delayed. 
By leaving it to the option of the individual property 
holder to undertake them or not as he pleases, society 
secures most of the gain and avoids most of the loss. It 
allows him to waste part of the capital of the community 
in unsuccessful experiments, believing that his example 
will be a warning to prevent others from following in his 
track, and that the immediate loss to the community may 
become a means of future gain. It guarantees him the 
good results from the successful experiments, trusting 
that competition will subsequently prevent his profits 
from being too large. 



1 1 6 SPECULA TION. 

§ 130. Where this view prevails, a new motive is given 
for the acquisition of property. It is no longer desired 
simply as a means of enjoyment, but as a means of con- 
trolling the industrial actions of other men. The pursuit 
of wealth beyond a man's present necessities is no longer 
a matter of avarice but of ambition. Such wealth gives 
its owner a power in no wise inferior to that of the success- 
ful general or politician. 

§ 131. The introduction of this new motive for amassing 
wealth produces the following effects : 

1. A great increase of accumulations. Under the stimu- 
lus of ambition many men are led to increase their produc- 
tion and diminish their consumption far more than any 
intelligent consideration of their own comfort would 
dictate. In this way we have a great increase in the 
amount of public wealth available for enterprises whose 
return is remote and involves long waiting. The rights to 
such wealth may not always remain in the hands of those 
who have done the most work or practised the most ab- 
stinence ; but it remains none the less true that private 
motives for work and abstinence are the most effective 
means of accumulating public capital. 

2. A process of natural selection of men who have 
ability to manage capital. If the property owner has 
shown foresight in investment he reaps a rich reward 
for his services in rendering a new process or locality 
available for supplying the wants of the community. If 
he has been over-sanguine, he loses his own capital 
and that of those who have trusted him, and becomes 
once more dependent on his labor. Under this system 
we have not simply a selection of the strong and an 
elimination of the weak, nor a selection of the indus- 
trious and an elimination of the lazy ; but a selection of 
the prudent and intellectual with an elimination of the 
reckless or emotional. The moral character of the em- 
ployers thus developed presents a mixture of good and 



NARROWED MARGIN OF PROFIT. 11/ 

bad qualities. The control is placed in the hands of men 
who are enterprising and efficient, but often narrow and 
unscrupulous. They possess sagacity which enables them 
to deal with the market ; they often fail to possess that 
broader sagacity which would enable them to deal equally 
well with those in their employ. The danger of this 
deficiency is greatly intensified by the possibility of specu- 
lating with borrowed capital, and gaining control of in- 
dustrial enterprise by transactions which are virtually 
gambling. 

3. An increased intensity of competition among those 
who handle the large accumulations of capital. This is 
contrary to the popular view. It is commonly assumed 
that the more competitors you have, the greater will be 
the intensity of competition. But in actual experience 
there is no competition in the world so intense as that 
which prevails between two highly organized bodies 
that stand opposed to one another. In the old days of 
small concerns there was much more slackness of manage- 
ment, and much larger profit per unit of product, than 
we find to-day. It is proverbial that the largest houses 
can make the closest calculations in selling goods at a 
slight margin above expense ; and competition is generally 
strong enough to force them to make these calculations 
closer than would have been deemed possible a half- 
century ago — in other words, to keep down profits. 

§ 132. In comparing our large factories of to-day with 
the smaller ones of two generations past, we find, on the 
whole, that the ratio of wage payments to interest and 
dividends is larger now than it was then. The margin of 
profit has been narrowing more conspicuously than the 
piece-price for labor has been diminishing. The large 
capital and its earnings make a greater impression on 
the public mind than did the numerous small capitals of 
independent producers ; but it is not probable that the 
aggregate valuation or remuneration of the capital of to- 



1 1 8 SPE C ULA TION. 

day has increased proportionately with the increase of 
demand for labor. We are not warranted in assuming, as 
so many of the socialists do, that profits are growing 
enormously and are to be regarded as sums withheld 
from labor. They are in most cases not disproportionate 
to the chances of loss. A very slight change in efficiency 
of management may readily convert the capitalist's sur- 
plus into a deficit. The charge made by the capitalist 
classes, for their services in industrial speculation, cannot 
be regarded as immoderate, if the work is well done. 

§ 133. But how far is this condition fulfilled? Does 
the existing system secure progress and avoid loss? To 
the first half of this question we may unhesitatingly give 
an affirmative answer. Whatever else the speculative sys- 
tem may do or fail to do, it gives us industrial progress. 
It was for this reason that it displaced the traditional 
methods of agriculture and manufactures which had pre- 
ceded it. The feudal system and the gild system were 
both too conservative; the system of private capital 
proved its superiority in being progressive. Nor has this 
merit outworn itself with age. The superior flexibility of 
the speculative system makes itself conspicuous not only 
in contrast with feudal industry, but also with modern 
state-owned industry. Though half the railroads and 
nine-tenths of the telegraphs of the world are in govern- 
ment hands, all the large improvements of method in 
these lines have been made under private enterprise. 

The work of avoiding losses has not been so well done. 
It is the theory of the modern system that the accumu- 
lated capital of speculators should act as an insurance fund 
to secure a steady supply of products and an unimpaired 
reserve of national resources. This general reserve is 
fairly well maintained ; but it is not always well utilized. 
The supply of capital is steadier and surer than the em- 
ployment of labor. Mistakes and wrongs of large specu- 
lators frequently result in commercial crises from which 



FINANCIAL LEADERSHIP. 1 19 

the whole community suffers. The occurrence of these 
crises constitutes the severest possible indictment against 
the modern speculative methods. 

§ 134. It jvill not do for capitalists to try to minimize 
this indictment, or to evade the responsibility for the evils 
attendant upon industrial depressions. Society gives its 
great financiers a trust compared with which all other 
trusts sink into insignificance. It gives them the power 
of directing the labor and capital of the country. If they 
can do this well, they will deserve the power and retain 
the trust. But in order that it shall be well done, the 
control must be in competent hands. 

To secure this result, the process of natural selection of 
employers must be what it purports to be — a survival of 
those who have proved their power to serve the public 
and an elimination of those who have failed to do so. 
The contest for commercial supremacy must be settled 
by success in organizing production and foreseeing con- 
sumption, not by success in gambling. If the industrial 
and financial struggle actually brings the best men for- 
ward, they show their ability in such a manner that we 
have little to fear from socialism. If a man's personal 
advantage is identified with the success of his business ; 
if his position in the financial world is dependent on his 
competence in the industrial world ; if, in short, he ar- 
ranges to stand or fall with the success or failure of his 
management, then we have a process of natural selection 
under which men who serve the public inevitably come 
to the front, while their less competent rivals are pushed 
into the background. If, on the other hand, the question 
of control is settled by gambling instead of by legitimate 
business transactions, if the possession of financial au- 
thority is made to depend on success in stock operations, 
rather than on success in organizing producers and meet- 
ing the wants of consumers, then we have a process of 
selection by which the wrong leaders come to the front 



I20 SPECULATION. 

driving out competitors who might serve the public better, 
though they have not known how to serve themselves quite 
so well. When the wrong men are brought forward, the 
speculative system is in real danger, because it does not 
do what the public has a right to demand of it. 

§ 135. We cannot rely upon legislation to protect us 
from this danger, because, as we have already seen, 
gambling transactions and legitimate transactions are 
indistinguishable in form. We must look to the public 
sentiment of the business community ; we must see that 
it recognizes the difference between legitimate and illegiti- 
mate speculation, and condemns the latter as a breach of 
trust. Such it is under existing conditions. The man 
who gambles away his money is not simply parting with 
his own enjoyment, but with his control of the industrial 
forces of the community. It is not like selling his labor : 
it is like selling his vote. 

If business men are not to be controlled by commercial 
ethics — ethics fitting the economic conditions of today, 
rather than those of five centuries ago, — they must expect 
to be controlled by something else. If they will not 
accept the full measure of responsibility which goes with 
their industrial power, they must expect to be deprived 
of responsibility and power together, by a popular move- 
ment in the direction of socialism. Such a movement is 
being aided and countenanced by every financier whose 
interests in the stock market lead him to forget the inter- 
ests of his properties, by every lawyer who teaches his 
clients to evade the responsibilities attaching to wealth, 
by every man who in the excitement of speculation loses 
sight of those responsibilities — by every one, in short, who 
forgets that under the existing system the possession of 
money involves a public trust, with whose fulfilment or 
non-fulfilment that system must stand or fall. \ 



CHAPTER V. 

INVESTMENT OF CAPITAL. 

The Wage System — Private Land Ownership — Patent Right — The 
Payment of Interest — Limited Liability. 

W. J. Ashley : " English Economic History." London and New York, 
1891, 1893. 

K, Marx: "Das Kapital." This book (which has been translated by 
S. Moore and E. Aveling), in the closing sections of the first volume, gives 
the socialistic view of the events and processes described in this chapter. 

§ 136. It is characteristic of the modern industrial sys- 
tem that a laborer who owns no capital, though nominally- 
free to do what he pleases, must actually find some prop- 
erty owner who will give him enough to keep him alive 
during the period which must elapse between the render- 
ing of the labor and the sale of the finished product. 
Under such circumstances, the laborer almost inevitably 
submits to the direction of the property owner in deciding 
how his labor shall be appHed. Laborers without capital 
must necessarily work on this basis ; even those who have 
small amounts of capital habitually do so. Such advances 
of capital are known as wages. Many writers of good stand- 
ing give broader definitions than this, but in the actual 
usage of ordinary life wages designate the sums paid by 
property owners, or their representatives, to laborers for 
work done under the direction of the property owners.' 

^ If the degree of education required is such that the laborer must be in 
large measure self-directing, these payments are known as salaries or fees ; 
the former term being applied to payments for continuous employment, the 
latter to payments for irregular or varying employment. Salaries correspond 
to time wages (ch. x.), fees to piece wages. 

121 



122 INVESTMENT OF CAPITAL. 

§ 137. Whatever be the details of the contract by which 
wages are determined, the employer must be in a position 
to guarantee the fulfilment of his part of the agreement 
and to relieve the workman of any risk which may arise 
from failure to sell the product of his work at the expected 
profit. This is essential to the idea of wages, and to the 
principles on which modern industrial society is organized. 
This is the reason why the employer must be a property 
owner, or must at any rate act as the agent or representa- 
tive of property owners. If he is not in this position, he 
cannot guarantee the payment of the wages he has agreed 
to give. The certainty that wages shall be paid is so im- 
portant to society that the law strains every point to 
secure this end. The employer should pay his hands in 
money, or in checks which are as good as money, not in 
orders upon stores or other forms of " truck." In many 
states he is compelled to make his payments as often as 
once a week. The workman not infrequently enjoys a 
" mechanic's lien " upon the results of his work ; for 
instance, if a builder for any reason cannot pay his jour- 
neymen the wages agreed upon, the journeymen can 
attach the building upon which they have been employed, 
and compel its owner to pay the wages due them. On 
the other hand the wages themselves are in many states 
exempt from attachment ; that is to say, if the laborer 
owes money to an outside party, that party cannot have 
recourse to the employer, and divert from the workmen 
wages earned but not yet paid. The wage contract, in 
such states, must be fulfilled with the workman directly, 
and not with the workman's creditor. Wherever society 
tolerates any failure on the part of the employer to meet 
such contracts fully and directly, it indicates a low stage 
of industrial development.' 

' An exception to the stringency of this requirement is found in the law 
concerning seamen's wages. In times past the shipowner has not generally 
been held liable for such wages unless the voyage was successfully completed. 
This was because marine enterprise was attended with such risks from ship- 
wreck or piracy that an effective guarantee was impossible. In recent years, 



COST OF PRODUCTION. 1 23 

§ 138. The great bulk of the wage payments in any com- 
munity is made by those who expect to sell the result of 
the lah)or to others instead of enjoying it themselves. Such 
a payment is a speculative investment of capital. Look- 
ing at the transaction from the private standpoint the 
property owner transfers a certain amount of money. to 
the laborer, in the hope of obtaining a larger amount of 
money in the future by the sale of the product of that 
labor. Looking at the transaction from the public stand- 
point, the laborer is enabled to consume a certain part of 
the public wealth, in the expectation that the products of 
his labor will more than replace the amount thus con- 
sumed. He receives as income the right to enjoy a part 
of the capital already existing' ; his employer hopes and 
believes that any destruction of public capital will be 
made good, and is prepared to bear the loss, in his own 
property, in case this expectation is not fulfilled. 

§ 139. The amount of capital thus sacrificed in the 
hope of its replacement and increase is known as cost of 
production. In its private sense, the cost of an article to 
any individual speculator is the amount of capital which 
he has advanced to secure it. This may have been paid 
either to the laborers in the form of wages, or to other 
speculators as a means of controlling the results of past 
labor. Private cost is better designated as expense.' In 
its public sense the cost of an article to the community is 

as the industry has developed and become more secure by better navigation 
and by the development of marine insurance, there has been an increasing 
tendency to treat seamen's wages just like other wages ; that is, to guarantee 
their payment even in the event ai shipwreck. 

' The money which he receives is known as nominal w^ges ; the enjoy- 
ment which he can command is called real wages. (See ch. x.) 

* Some writers prefer to measure cost in terms of pain (total and margi- 
nal "disutility") rather than in terms of waste. The practical difference 
resulting from the use of the two methods is not very great, for an increase 
or diminution of pain is usually accompanied by a corresponding increase or 
diminution in waste ; but waste is a Vjetter standard, because it is a more^ 
measurable thing than jjain, and because the reduction of waste furr.ibhes a ) 
more tangible goal of public policy than the reduction of pain. 



124 INVESTMENT OF CAPITAL. 

the amount of public capital which has been consumed 
or rendered unavailable in connection with the production 
of that article. 

The excess of return above cost is known as profit. 
The profit of an individual is the difference between 
money advanced in production and money received from 
the sale of the product. The profit of a community is 
the difference between old products consumed and new 
ones produced. Individual profit is tolerably easy to 
measure ; the profit of a community, extremely diffi- 
cult.' 

Under the modern wage system society gives the em- 
ployer the right to realize individual profit from the sale 
of the products of labor in the belief that his effort to do 
this will conduce to public profit. 

§ 140. Profits are neither more nor less than the excess 
of the selling price of the products of industry above the 
amount advanced as wages. It is true that some of the 
investments of an individual capitalist are not made in 
the form of wages, but in payments for materials and 
machinery which other capitalists have made ready for 
use. But if we look at the relation between capitalists 
as a class and laborers as a class, we shall find that the 
capitalists as a body advance wages, and appropriate the 
difference between the price paid to the laborers and that 
received from the consumers. The expectation of this 
difference or profit gives them a motive to utilize their 
capital, and to make it more available as a means of 
public income. 



' While the effort of the speculator to reduce his expense and increase 
his profit tends on the whole to reduce public cost and increase public profit, 
it must not be assumed that expense corresponds at all accurately to cost, or 
private profit to public profit ; any more than the selling prices of articles 
corltespond to their total utility. The producer's surplus described in chap- 
ter ix. represents in large measure an excess of expense above cost ; an 
amount transferred from the capitalists to the laborers in excess of the 
necessary consumption of the latter. 



FIXED CAPITAL. 12$ 

If the process of production is a brief one, this motive 
is enough to make people invest their capital. If a man 
has more property than he needs for immediate use, he 
is glad to apply it in such a way as to give him control 
of the labor of others. If the chance of gain is greater 
than the chance of loss most men would rather invest 
their capital than store it up. There is good ground for 
such expectation of gain from investment of capital when 
an intelligent man takes control of a process whose dura- 
tion is short. Any skill that he may show redounds to 
his own advantage. But in a long process of production 
the case is different. The instant it has proved a success, 
other competitors come into the field and reduce profits 
by their competition. The pioneer in any industrial 
method which involves remote returns, takes all the 
chances of failure, and may receive but a small part of 
the rewards of success. Naturally there is great reluc- 
tance to take the initiative on terms like this. It is not 
enough to give the speculator direction of his labor and 
the right to dispose of his products, in order to induce 
him to invest his capital for such remote objects. He 
must receive a guarantee of permanent profit in case of 
success, sufficient to make him hazard the risk of perma- 
nent loss in case of failure. 

§ 141. Capital thus invested for the sake of a remote 
return, whether in the form of agricultural improvements, 
buildings, or machinery, is said to be fixed. It can rarely 
be withdrawn from its original use and applied in any 
other place or for any other purpose, without great loss 
to the owner and to the public. But in spite of this 
danger of loss the economy to the public, attendant upon 
the use of fixed capital, is very great, and constantly in- 
creases as population becomes denser. 

The first farms cultivated are not as a rule the best 
ones, but those which require the least original outlay. 
The first industries practised are those which require the 



126 INVESTMENT OF CAPITAL. 

fewest tools. The first roads are made with the least 
possible amount of surfacing and drainage. The mini- 
mum of fixed capital is used in every instance because of 
the small market and the need of immediate returns. 
But as the community grows it adopts a different system. 
It resorts to farms which are less accessible, and to 
methods of cultivation which are less obvious, but which, 
when once brought into use, are more productive. It 
applies processes of manufacture whose dominant prin- 
ciple is not to reduce the outlay, but to increase the out- 
put. It adopts means of transportation which cost much 
more to establish, but much less to use. The permanent 
investment of fixed capital keeps growing larger; the 
current expenses per unit of product grow correspond- 
ingly smaller. 

The original outlay connected with an old-fashioned 
shoemaker's establishment was very small. A few 
benches and tools were sufficient means for conducting 
the business. But the labor of sewing each pair of shoes 
was very large. When hand work gave place to factory 
work, it necessitated an original investment of many 
thousands of dollars ; but when a factory was once estab- 
lished, the direct expense of making each pair of shoes 
was very small. The larger the market for shoes, the 
greater was the comparative economy of factory labor. 
The cost of an old-fashioned country road is next to 
nothing ; the cost of carriage upon such a road may 
amount to a dollar a ton a mile. Substitute a modern 
macadamized road, and you increase the original cost, 
but diminish the cost of carriage. Spend $30,000 a mile 
on a railroad, and the direct cost of carrying freight will be 
less than a cent for each ton carried. Increase the in- 
vestment in the railroad by reducing grades and making 
more solid structures, and you will treble the possible 
train loads, with a corresponding diminution in cost per 
ton. 



MODERN LAND TENURE. 12/ 

To realize this economy a large market is necessary. 
If there are only a hundred people to wear the shoes or 
to use the road, old-fashioned methods are more eco- 
nomical than modern ones. But with increase of popula- 
tion we find the opportunity for increasing use of fixed 
capital and the necessity for such economic institutions 
as shall encourage its investment. 

§ 142. The first and in some respects the most im- 
portant of these institutions was private propert}/ in land. 

The feudal land tenure, whose development was de- 
scribed in chapter ii., was based upon force. The 
dependants of the mediaeval lord paid him rent, either in 
labor or in money, as a price for the security of posses- 
sion which he could give them. These feudal burdens 
were far more analogous to modern taxes than to modern 
ground-rents. They represent a price paid to the sover- 
eign for his protection, rather than an economic equiva- 
lent paid to the property owner for the productive 
capability of the land. But when this security was once 
so thoroughly established that the strong arm of a mili- 
tary chieftain was no longer needed to protect his vassals, 
tenure of land gradually passed out of the hands of sol- 
diers and into the hands of capitalists. It was found 
more profitable by the tenant to cultivate improved land 
which produced a great deal, and pay a substantial rent 
for it, than to get a bare living from unimproved and 
unproductive land, even though the rental of such land 
was merely nominal. This change was not only better 
for the tenant but better for the community. If a new 
system of cultivation enabled more food to be raised 
from a given area with the same amount of labor, it was 
of great advantage to the community to have that system 
adopted. When processes of agriculture were discovered 
which promised an increased permanent productiveness 
of the land, it became necessary to guarantee to men who 
had the capital for applying these processes a sufficiently 



128 INVESTMENT OF CAPITAL. 

long and complete tenure to give them the motive to 
make the experiment. No one would be wilhng to incur 
the outlay involved in draining or in artificial fertilizing 
unless he was guaranteed the occupancy of the land thus 
improved for a sufficiently long time to make the change 
remunerative to him, as well as to the community in 
general. For no new process is an assured success 
until it has been actually tried. Successful investment 
of capital in the improvement of real estate has been a 
means of making large fortunes ; but these fortunes were 
not certainties from the outset. If they had been, the 
community could and would have made the improve- 
ments from the public funds at public expense. The 
profits of the successful, in land speculation and land im- 
provement, have been offset by the losses of the unsuc- 
cessful. The monopoly of an advantageous location or 
of a fertile piece of ground which the real-estate owner 
enjoys is a premium which has been offered to him be- 
cause of the skill of capitalists in developing land at the 
points and in the ways where such development was 
needed. 

In view of the public necessity for improvement of real 
estate the laws which prohibited the alienation of land 
from the families of the nobles were gradually modified; 
and the farms passed from the hands of soldiers who 
only knew how to spend money into the hands of prop- 
erty owners who understood how to invest it. 

§ 143. This change in the system of tenure was by no 
means confined to agricultural lands. The same course 
of development is seen in mining. Mining law has its 
hunting stage, where a man wanders up and down the bed 
of a creek in the hope of finding nuggets of gold. It has 
its pastoral stage, where the miner has his movable prop- 
erty, perhaps a mule and a wheelbarrow, and uses them as 
best he can in collecting natural deposits. In this state of 
society rights to the instruments of production are clearly 



MINING CLAIMS. 1 29 

recognized, and the stealing of a mule is punished with 
the utmost severity. But rights to real estate are as yet 
chaotic. A man must be prepared to defend them by his 
own arm. The wanderer has a claim to the bed of a stream 
only as long as he is actually in possession and can main- 
tain his right for himself. But as population becomes 
more dense and these superficial sources of supply are 
exhausted, a new system of mining property becomes 
recognized in usage and in law, whereby the man who 
invests capital in a location obtains permanent rights to 
this location. Whether he makes his arrangements for 
washing down large alluvial deposits far away from an 
existing stream, or for tunnelling into the quartz rock for 
the sake of the veins of metal which it contains, the real 
estate which he has developed becomes his own. This 
permanent right of property, with the attendant monop-^ 
oly which it gives, is an absolute necessity if the com- 
munity wishes a man to invest large capital in mining ; 
for the whole investment may prove a failure, and no man 
is willing to take the chance of failure unless assured of 
special and permanent advantages in case of success. 
If the community has reached a point where it needs to 
have much capital used in mining, it must give the capi- 
talist rights of control and chances of possible gain, to off- 
set the great chances of total loss. 

§ 144. The conditions under which private ownership 
of land has developed are strikingly illustrated by a com- 
paratively new form of landed property, — submarine rights 
to oyster-beds. Of all waters in the United States, those 
of the Chesapeake are perhaps best fitted for the produc- 
tion of oysters. But the system of tenure recognized by 
the state of Maryland was not well adapted to their 
development. Certain ill-defined parts of the Chesapeake 
and other oyster grounds were set apart for dredging, cer- 
tain other parts for " tonging." There was also a right given 
to individuals to take up five acres of oyster land under 



130 INVESTMENT OF CAPITAL. 

water. But this right or license was revocable at the pleas- 
ure of the state, so that the licensee had not the assur- 
ance of permanent holding which would make far-sighted 
policy in the use of these oyster-beds profitable or even safe. 
The oysterlaw of Maryland was almost exactly analogous 
to the land law of the mediaeval village community, with 
its ill-defined common, its ill-defined forest land, and its 
extremely precarious rights of use of individual strips of 
the soil. The result was the same in either case. Proper 
utilization of the land was impossible. The Maryland 
oyster-beds were so rapidly exhausted as to threaten the 
extinction of the industry in spite of all natural advan- 
tages for its prosecution. Meanwhile there was a great 
increase in the production of oysters in the waters con- 
trolled by some other states, where rights of permanent 
tenure were allowed that were closely analogous to ordi- 
nary property in land. The oyster-beds thus held formed 
a large source of income to their owners, but it was not 
an income amassed at the expense of the state. The 
oyster growers of Long Island Sound have paid in taxes 
an amount far exceeding the total rental value of the 
oyster-beds which the state of Maryland leased for short 
terms under licenses revocable at will. 

§ 145. The good effects of the system of private land 
tenure are most conspicuously seen when the owner and 
the occupier of the land are one and the same person. 
Under these conditions, land ownership serves at once as 
:a motive to zeal in labor and to liberality in investment. 
Where one man owns the land and another occupies it, 
the right of the owner to the benefit of all improvements 
not infrequently acts as a discouragement to the occupier 
and prevents him from laboring with the zeal or the skill 
which he would otherwise use. The loss in efficiency of 
labor under such circumstances may be greater than the 
public gain from the capital invested. . Large tenant 
farms are sometimes less well developed than the peasant 



ABSENTEE OWNERSHIP. I31 

properties on the continent of Europe, — in spite of the 
disadvantages, inseparable from small husbandry and scant 
capital, under which the latter suffer. Systems which 
recognize the right of the tenant to compensation for 
improvements, or which guarantee him fixity of tenure at 
a stated rent, have often proved salutary. They help the 
public by encouraging the tenant more than they hurt it by 
discouraging the owner — unless the owner was far-sighted 
enough to give the tenant these privileges without com- 
pulsion. Even so crude a device as the metayer system 
(§ 40) often works better, on account of the permanence 
of tenure which it gives the occupier, than a system of 
tenancy at will under a capitalist landlord. 

If for any reason the landlords do not properly develop 
the real estate which they own, and try to get money 
out of the land without putting money into it, the 
system of private ownership proves itself a thoroughly 
bad one. The land tenure of a body of foreign conquer- 
ors represents a drain on the community rather than an 
addition to its resources. The case of Ireland is an 
instance in point. The right to receive rent from Irish 
land has habitually served, not as a motive to improve the 
land, but as a means to degrade the laborer. When this 
result takes place to a marked degree, modern society 
often so far modifies the principle of private property in 
land as to introduce j'Wfa^zVzV?/ rents instead of competitive 
ones ; substituting public arbitration between landlord 
and tenant for a system of competition which is so short- 
sighted or imperfect as not to subserve the public needs. ^ 

§ 146. When the habit of land speculation becomes 

' Another conspicuous case where private land ownership fails to serve 
the public interests is connected with the destruction of forests. In this 
case the governments have tried to remedy the evil by encouraging the right 
use of the land rather than by prohibiting its wrong use. The point in- 
volved in public or quasi-public forestry is treated in the chapter on co- 
operation. 



132 INVESTMENT OF CAPITAL. 

prevalent, there is always danger that the system of pri- 
vate land ownership will be made a means of hurting the 
public instead of helping it. 

It will not do to go to the extreme of condemning all 
land speculation as hurtful. A man who sees that a large 
business block will be wanted in a certain spot at the end 
of ten years may serve the public by keeping the lot un- 
occupied during that time. For the gain which the owner 
and the public would reap from the use of inferior build- 
ings during those ten years would not compensate the loss 
which would be involved in tearing them down before 
they had paid for themselves, or in waiting until they had 
paid for themselves before erecting the new block. In 
such a case a land speculator will contribute to the best 
utilization of the public wealth by a far-sighted calcula- 
tion of the time when investments of capital will be most 
profitable. But it is needless to add that a great deal of 
land speculation is of a totally different character from 
this, and is a mere effort to get money out of the land 
without putting money into it. Such irresponsible specu- 
lation is greatly increased by the mistaken practice of 
assessors in rating unimproved land at relatively low 
figures on account of its lack of productivity and conse- 
quent inability to bear high taxes. No man should be 
encouraged to keep land out of use by a remission of 
burdens which necessarily puts heavier taxes on those who 
have put adjoining land into use. He is holding his 
property in a shape where it does the public no present 
good in the hope that the work done by others will make 
this a profitable policy in the long run. He may be right ; 
but for the present he is causing public inconvenience, 
and cannot complain if he is taxed on the basis of his own 
estimate of the value of the land rather than on that of its 
immediate productiveness. If he cannot pay taxes he 
can sell it to some one else. Great as are the mistakes of 
the single-tax agitators it is to be hoped that they may 



PATENTS. 133 

have a salutary effect in leading assessors to put heavier 
burdens on ground values and lighter ones on improve- 
ments. For after all that can be said in behalf of land 
speculation, it remains practically true that the men who 
have done conspicuous public service with their land are 
as a class those who have been prompt rather than tardy 
in its development. 

§ 147. While agriculture was helped by giving the capi- 
talists ownership of the land, the development of manufac- 
tures was stimulated by grants of monopoly. At first 
these grants were made quite recklessly. In the early his- 
tory of England we find frequent records of permanent 
privileges assured to an individual citizen in consideration 
of his services in introducing some new industry. Such 
a system afforded grave opportunities for abuse. Privi- 
leges were often granted to court favorites as a reward of 
personal or political services. The introduction of a new 
manufacture was made a pretext for oppressive taxation 
of the people who had to use its products. Special grants 
of this kind, however plausibly worded, were generally 
unpopular, and formed a frequent source of public com- 
plaint against the sovereigns of mediaeval Europe. 

§ 148. In modern times the grant of monopoly privi- 
leges is hedged about with precautions against such abuse. 
The system of patents confers a monopoly on the man 
who introduces a new invention. But the government 
takes pains to insist that such an invention shall be really 
new, and the monopoly granted is only a temporary one. 
A patent system, if properly guarded, seems to be thor- 
oughly justified by its results. In the absence of such 
protection few new inventions would be developed. The 
risk attending the introduction of a new process is always 
great. Even when it works thoroughly well in the labora- 
tary or model room, it may not work well in public. The 
man who first develops a new invention loses his whole 
capital if it fails. If he is immediately exposed to free 



134 INVESTMENT OF CAPITAL. 

competition in case of success, he can enjoy exceptional 
profits for a short time only. The risk of loss, under such 
circumstances, outweighs the possibility of gain. No man, 
as has already been said, will take the lead in a hazardous 
experiment when those who follow him have practically 
equal chance of gain and almost no chance of loss. The 
patent, by making the gain a permanent one, makes it safe 
for a capitalist to develop a new process. This is the real 
justification of the system. The American theory that the 
patent is a reward for invention, and the English theory 
that it is a reward for disclosure of the invention to the 
public, both fail to touch the true grounds on which 
patent right has grown up. It has established itself, not 
primarily as a stimulus for invention or for disclosure, but 
for utilization and development of new methods requiring 
the investment of capital and the guarantees which shall 
make such investment possible. 

The monopoly of the patentee is in one respect much 
more complete than that of the landowner. The ex- 
clusive right to use a certain process may shut out all 
competition ; while the exclusive right to use a certain 
piece of land rarely prevents other landowners from com- 
peting with the most favored individual. It puts them at 
a slight disadvantage, but not often at a prohibitory one. 
The monopoly conferred by a valuable patent while it 
lasts is thus much more absolute. To offset this, it is 
limited in duration. After a comparatively short term of 
years the patent expires, leaving its owner no advantage 
except what he has derived from possessing an established 
business; while the land monopoly may continue to give 
an increasing advantage for an indefinite length of time. 

§ 149. The monopoly conferred by copyright is closely 
analogous, both in its form and in its justification, to that 
of patent right. It is of comparatively little importance 
for the community to decide whether an idea is or is not 
a fit subjeqt of property; but it is of great importance to 



TARIFFS AND SUBSIDIES, 1 35 

have the law in such a shape that a pubhsher can safely 
risk his capital in making that idea accessible to the read- 
ing public. A new book may prove a failure, just as 
much as a new process. For the sake of profits possible 
under a copyright law, the publisher can afford to take 
the risks of failure which he cannot do in the absence of 
such protection. 

§ 150. Another form of monopoly, less complete than 
those just described, is exemplified by protective tariffs 
and navigation acts. The benefit of such monopoly is 
not given to one individual to the exclusion of other 
individuals, but to the home producers to the exclusion of 
foreign competitors. The underlying motive for such 
protective legislation, when framed with a public purpose 
in view, has been like that of private land ownership or 
patent right ; to give the home country the benefits 
accruing from investment of capital under its own imme- 
diate control. The case of a protective tariff differs from 
that of a patent in that the private risks in case of failure 
and the public gains in case of success attendant upon 
the transplantation of a process which is already in use 
elsewhere are far less than those which attend the develop- 
ment of one which has been as yet totally untried.^ 

§ 151. Where for any reason grants of monopoly have 
been impossible, or inadequate to secure their purpose, 
governments have often resorted to subsidies ; as in 
bounties for the production of sugar, municipal subscrip- 
tion to railroad securities, or, most frequent of all, pay- 
ments to shipbuilders and shipowners.^ How far such 

^ The arguments concerning the protective tariff system are so compli- 
cated and depend so much upon the theory of wages that their discussion 
must be reserved for a later chapter. 

^ Exemption from taxes, such as is frequently granted by our vv^estern cities 
for the purpose of attracting manufacturing capital, is to all intents and pur- 
poses a subsidy. The same thing of course can be said of the grants of 
public lands which have been used by the United States to encourge trans- 
portation enterprises. From a very early period we have had important 



136 INVESTMENT OF CAPITAL. 

subsidies are justified is a c^uestion which must be reserved 
for further discussion in connection with matters of inter- 
national poHcy. 

§ 152. A more important means of encouraging the in- 
vestment of capital was the modern system of interest. 

When debts were chiefly created for the sake of per- 
sonal expenditure, the taking of interest or usury was 
deservedly condemned. The men who borrowed money 
and spent it did not, as a rule, increase their productive 
capacity. They relieved a present need ; but they gener- 
ally did nothing but put off a day of reckoning and make 
it heavier when it actually did come. In cases like this, 
it was fair enough to say that money did not produce 
money and to condemn interest on this ground. Medise- 
val loans were generally unproductive loans. The lender 
did no service to society which would entitle him to claim 
encouragement. So far as the prohibition of interest 
prevented borrowing for personal expenditure, it was a 
good thing. 

But when a considerable part of the loans were made 
for productive purposes, the case was altered ; and it was 
not long before the law and public sentiment were altered 
correspondingly. We have not space to follow out in 
detail the various subtleties by which this change was justi- 
fied to the legal mind.' The traditional excuse for interest, 
as a penalty for delay in payment,* was made to cover 

gifts to encourage the building of roads and canals. In the years from 1850 
to 1856 more than 25,000,000 acres of land in various states were given to 
railroads. During the war and the period immediately following it terri- 
torial lands were given away on a yet larger scale, the grants in aid of Pacific 
roads alone amounting to over 150,000,000 acres. The result of these gifts 
has been far from proving an unmixed good. They stimulated unsound 
railroad schemes and caused railroad building to be misdirected. Provisions 
intended to protect the interests of the government were disregarded. Set- 
tlers were induced to move too far west, to points where they were at the 
mercy of railroad agents. In many instances the only gainers were land 
speculators and financiers of the worst sort. 

'See Ashley, "English Economic History," chs iii. and vi. 

* Hence the derivation of the word interest — a difference made by time. 



HISTORIC FORMS OF INTEREST. 1 37 

cases where the delay was purely nominal. The theory 
of compensation for loss (^damnum emergens) was stretched 
to cover cases where the only loss was loss of oppor- 
tunity for profit {lucrum cessans). Of yet wider import- 
ance was the recognition of the right of one associate in 
an enterprise to insure a fixed return to another instead | 
of a variable one. This contract of assurance {contractus ' 
trinus) really stands at the foundation of the modern 
interest system. The lender of capital is an investor who 
commutes his chance of a large profit for the assurance 
of a smaller one. Society allows this commutation, be- 
cause it is a public advantage to have the capital of these 
investors used in enterprises which they cannot them- 
selves supervise, and whose risks they must therefore 
leave to others. The justice of interest is not based 
primarily on equities between borrower and lender, but 
on the public advantage of encouraging guaranteed in- 
vestments.* 

§ 153. The use of capital as a means of ensuring its 
owners a fixed return derived additional recognition and 
sanction from another quarter as the purchase of rent 
charges became more frequent. Whenever a piece of 
property was economically productive, its selling price 
was pretty sure to bear a fixed relation to its rental. 

^ Most of the popular justifications of interest try to reach their end by 
too short a route. Bastiat uses the illustration of a man who has made a 
plane which so increases the efficiency of labor that some one who wants to 
borrow it will promise to give back, at the end of the year, not only a new 
plane to replace the old one which has worn out, but a plank in addition. 
George criticises this as inconclusive, since the only way in which the owner 
of the plane could have obtained a plank was by working with it ; but says 
that if one person lends another a calf, the productive powers of nature 
will put him in a position to return a cow at the end of the year [without 
working : a curious conception of farm life], and that this justifies interest, 
because capital gives control of the productive forces of nature. In point 
of fact there is no essential difference between the two cases. We allow in- 
terest because it is for the advantage of the community to encourage a man 
to save capital which will support people in making more planes than he 
himself can use, or in bringing up more animals than he himself can watch. 



138 INVESTMENT OF CAPITAL. 

What this relation was depended partly on the number 
of persons who needed ready money and were prepared 
to sell future income for that purpose, and partly on the 
security felt by the buyers that their tenure and income 
would be undisturbed. The ratio of the selling price to 
the income is known as the rate of capitalization. Where 
there was a well-defined rate of capitalization it amounted 
to almost the same thing as an interest rate to the in- 
vestor. Instead of loaning money at five per cent he could 
buy a piece of rented land at twenty times the annual 
rental. Even where the fee of the land was not actually 
sold, it often happened that fictitious rent charges were 
created and the right to receive these charges forever was 
sold for a lump sum ; which amounted virtually to an 
interminable loan at interest secured by the productivity 
of the land. The German word for interest {Zins) is 
derived from the census or rent charge thus capitalized. 

§ 154. When interest was once recognized as a legiti- 
mate thing, the authorities were not slow to profit by it ; 
sometimes in questionable ways. Governments were en- 
abled, by the promise of interest, to obtain in the form of 
voluntary contributions sums which they could not have 
secured by taxation without danger of revolt. Privileged 
classes or individuals were allowed to establish pawn- 
brokers' shops and other doubtful agencies as a means of 
making profits by loaning money. All these things, in 
spite of the evils connected with them, taught the states- 
men and the public the usefulness of a fund of capital 
and the power of a small fixed return to lead people to 
save and invest such capital. The modern savings bank, 
which offers depositors a low rate of interest and then 
invests the money thus obtained in channels which the 
depositors could not have used by themselves, either 
because their individual savings were too small or their 
business experience inadequate, is an example of what 
can be done in this way. The life insurance company, 



USURY LAWS. 139 

when properly managed, is an almost equally effective — 
indeed, in some respects a more effective — means to the 
same end.* Both these institutions give a stimulus to save 
and avoid the necessity of hoarding. They thus cause 
the public capital to be increased and to be effectively 
utilized. 

§ 155. It is one thing to recognize the usefulness of the 
system of interest ; it is quite another thing to leave bor- 
rowers and lenders at liberty to fix the rate of interest by 
mutual agreement. To a large section of the public it 
seems as if the lender had every advantage over the 
borrower in settling the terms of such a transaction, and 
were likely to make an unfair use of this advantage. He 
has capital and can wait, while the borrower cannot ; he 
has intelligence to see what other people are doing, while 
the borrower's vision is often much more restricted. 
Under the influence of these ideas nearly every nation 
has passed usury laws, fixing a legal rate of interest, 
stigmatizing any charge above that rate as usury, declar- 
ing contracts at higher rates void, and often visiting the 
lender with the severest penalties. 

Where a large part of the borrowers are so ignorant that 
there is no effective competition among capitalists, and 
no market rate of interest, such prohibitions appear to be 
justified ; especially if the legal rate is placed high enough 

^ The life|insurance company has the advantage over a savings bank in 
knowing when it will receive payments and (by the law of averages) when it 
must make them. It can thus keep smaller reserves and utilize more fully 
the capital entrusted to its charge. It also makes its payments at the time . 
when the need for them is supposed to be greatest. It is further claimed, 
as a public advantage, that it compels a certain amount of saving on the 
part of the policy holders every year. But this is quite as likely to prove a 
burden as an advantage. While such compulsion is of use to the improvi- 
dent, it may prove a severe load to the unfortunate, enhancing instead of 
lightening the weight of his misfortune. To such a man, and indeed to 
tK.e provident investor as a rule, the elasticity of his relations with a savings 
bank, where he deposits money when he can and withdraws it when he must, 
is an inestimable advantage. 



I40 INVESTMENT OF CAPITAL. 

to cover the risks on all ordinary loans.' A usury law of 
this character may prevent cases of shameless extortion, 
where the creditor so presumes on the debtor's ignorance 
as to charge rates far above those which ordinarily pre- 
vail. Among non-commercial peoples there is serious 
danger of just this thing. The Russian peasantry is now 
suffering severely from loans unintelligently contracted, 
whose charges have become a burden too heavy to be 
borne. Anything which can prevent the imposition of 
such burdens is likely to be good for the community, A 
law fixing a maximum rate of interest which can be col- 
lected from such borrowers may cause temporary hard- 
ship by making some men unable to borrow ; but even 
this is much better than an assumption of obligations 
which purchases temporary relief at the expense of future 
independence. 

§ 156. In commercial communities the case is quite dif- 
ferent. Where each borrower knows to some extent what 
the others are doing, the competition of different lenders 
produces a market rate which is fair to both sides. Even 
if the borrower in a particular case be weak and the 
lender strong, the latter cannot charge a high rate of 
interest, because other lenders stand ready to underbid 
him. The rate of interest for any given class of risks 
will fall until the supply and demand of capital become 
equal. If the attempt is made to reduce the market rate 
still further by usury laws, the effect is analogolis to that 
of laws regulating price (§ 97) ; but there are complica- 
tions, due to the ease with which usury laws can be 
evaded, which make the attempt to reduce interest by 
statute even more conspicuously futile than the attempt 
to reduce prices. 

^ The German usury law names no specific maximum rate, but leaves it to 
the judicial authorities to determine whether, in view of the special circum- 
stances of each case, the lender has taken advantage of the borrower's ignor- 
ance or distress to charge more than a fair amount. This seems a wise 
method of procedure. 



EVASION OF USURY LAWS. I4I 

If the legal rate of interest is made lower than the com- 
petitive rate which equalizes supply and demand, and if 
the law is obeyed, the demand for loans will tend to 
increase in consequence of the lowness of the rate, and 
the supply of capital to loan will tend to diminish. There 
will then be an excess of demand over supply. A part of 
those who want loans will get them at low rates ; a part 
will not get them at all. 

If we could be sure that the people who did not get the 
loans were the ones who did not need them, and that 
their willingness to pay higher rates was the result of self- 
destroying recklessness, we might be well content with 
the effects of a usury law. But this is not ordinarily the 
case. In an intelligent community the men who are will- 
ing to pay high rates are quite generally the ones who can 
make productive use of capital. So far as they are pre- 
vented from borrowing, the active use of capital is 
lessened, and the industrial progress of the locality hin- 
dered. If a state makes a law fixing interest at six per 
cent when a number of men are willing to pay eight, it 
simply means that those men, if they obey the law, 
cannot get the capital they want. 

§ I 57. In point of fact, they do not obey the law. If a 
borrower is really desirous to get a loan and cannot have 
it at low rates, there are many indirect ways of making 
the interest charge higher than appears on the face of the 
contract. On an ordinary industrial loan, the borrower 
may pay a large commission to the man who negotiates 
it, part of which can go to the lender ; or he may tacitly 
content himself with the receipt of a sum smaller than 
the nominal amount of the loan. If a note is given for 
$1,000, payable at the end of five years, bearing six per 
cent interest per annum, and the borrower tacitly accepts 
a payment of $950 instead of $1,000 as a consideration 
for this note, the actual rate paid is about seven per 
cent annually instead of six. On short-time loans from 



142 INVESTMENT OF CAPITAL. 

banks, the means of evasion are yet more numerous and 
more difficult to detect. The bank may insist on the 
maintenance of a large deposit account in its hands, 
which virtually reduces the sum lent ; or it may make a 
fictitious charge for collection of the note at maturity, 
which, on a short-time loan, adds a great deal to the rate 
of interest. If a bank discounts a sixty day note at six 
per cent, the total interest charge is one per cent; if to 
this figure it adds one quarter of one per cent for col- 
lection, it greatly increases the interest rate without 
directly conflicting with the letter of the usury law. 

If intelligent borrowers want loans and can get them by 
using these means, they will use them. The borrower 
runs little or no risk in these operations ; it is not against 
him that the provisions of the law are directed, and he 
does not regard himself as a lawbreaker. The case of the 
lenders is different. They run a slight risk ; and even if 
the act cannot be brought home to them, they know that 
they are breaking the law. Some are deterred from these 
transactions by their risk ; more, by their crookedness and 
virtual illegality. Thus while the demand for such loans 
is not much checked, their supply, even at the old com- 
petitive rate, is considerably diminished. Therefore, 
while the more scrupulous lenders are kept out of the 
market by a usury law, the less scrupulous ones are able 
to take advantage of the reduced competition to charge a 
higher rate of interest, which serves as a more or less ade- 
quate compensation for the risk to their pockets and 
the strain on their consciences. Meantime the borrowers 
are suffering both from the scrupulousness of the honest, 
who refuse them capital, and from the unscrupulousness 
of the dishonest, who charge them extra high rates ; and 
even if some borrowers get their loans a little cheaper 
from the operation of the law, the gain at this point is 
dearly purchased by the loss at others. 

§ 1 58. While the system of interest on loans has won its 



SECURITY FOR DEBTS. 143 

way to recognition, imprisonment for debt and other 
personal means of enforcing payment have been gradu- 
ally falling into disuse. Increased control over the terms 
of the loan has gone hand in hand with diminished 
power over the person of the debtor. Both of these 
changes arise from the same cause. Each is a virtual 
recognition of the fact that a loan is justified by the pro- 
ductiveness of the tiling for which it is used, rather than 
by the wants of \}i\e person by whom it is borrowed. Once 
having grasped this fact, we can draw two conclusions 
from it. (i) If a loan will result in a really productive 
thing, we should give the borrower every chance to 
attract capital for its creation, (2) If a loan will not 
result in a really productive thing, we should give the 
lender no inducement to advance the money except the 
motive of personal kindness, and no right to impose 
future burdens on the debtor which will belie or conflict 
with the motive of kindness. Both of these results are in 
large measure accomplished by making the creditor look 
to the investment rather than to the borrower for his 
security. We have abolished imprisonment for debt, not 
so much on account of the hardship to the debtor, who 
may be a very worthless person, as on account of the dis- 
advantage to society in having money lent on personal 
security. It is not that we love the debtor more, but the 
creditor less. It is for like reasons that civilized commu- 
nities have so frequently abolished or mitigated laws con- 
cerning attachment of wages. If a store has given a 
workman credit, it seems at first sight fair that the owner 
of the store should have a legal claim on the workman's 
wages when they become due. Yet the evils connected 
with store credit are so considerable, and the unwisdom 
of encouraging workmen to get into debt is so manifest, 
that society discountenances the creation of such debts by 
removing or restricting the facilities for their collection. 
§ 159. Another phase of the limitation of personal lia- 



144 INVESTMENT OF CAPITAL. 

bility, and one which has stimulated productive specula- 
tion in the very highest degree, is exemplified by the 
position of the shareholders in a modern industrial corpo- 
ration or joint stock company. The old theory was that 
if a man went into business of any kind he should be 
held personally responsible for all debts incurred in con- 
nection with it. In case of an individual who has mat- 
ters under his immediate control this is perfectly right. 
In the case of a partnership it may work injustice, when 
one man is held responsible for debts incurred by the 
unwisdom or wrong doing of his partner; but as long 
as the number of partners is small, each can be presumed 
to know if the other is doing wrong and can be held 
accountable for any failure to protect himself and the 
public. But as a concern becomes larger and larger, it 
grows more difficult for a number of individual owners to 
see how it is managed. If a hundred men unite their 
capital in an industry they must necessarily put the con- 
trol in the hands of a board of directors, and can only 
know by occasional reports how their business is con- 
ducted. Under these circumstances it is manifestly 
unjust to hold them all responsible to the extent of 
their whole private fortunes for mismanagement on the 
part of a director. The investors know less about the 
anions of the director than do those who have commercial 
dealings with him. Under such circumstances it is q-uite, 
fair to transfer a part of the responsibility fo r loss from 
the shoulders of the investor to those of the outside- 
public. It is not only equitable, it is necessary. With- 
out such limitation of responsibility it is practically im- 
possible to get the necessary capital subscribed for 
undertakings where the investors cannot exercise per- 
sonal supervision. One of the earliest attempts to meet 
this need was by the partnership in commenda, where a 
comparatively small number of persons assumed the 
active management and the responsibilities of the enter- 



LIMITED LIABILITY. 145 

prise, while others simply furnished capital for the sake 
of a share in the profits. A better form is the modern 
joint stock company, in which all shareholders stand on a 
common basis of limited liabihty, and choose a few repre- 
sentatives to exercise active supervision of the business. 
The system of limited liability distinguishes such a cor- 
poration from a partnership. If a man puts a thousand 
dollars into a partnership, and the firm contracts debts in 
excess of its resources, he may be called upon to pay 
many thousands more to satisfy the claims of creditors. 
But if he puts his thousand dollars into railroad stock, he 
is quit of all further responsibility. His liability is limited 
to the amount of his original investment. If the company 
is well managed he will get his dividends. If it is badly 
managed he will probably lose his money. But his loss 
will be confined to the amount of his stock subscription. 
If the liabilities of the company exceed its resources, that 
is the affair of the creditors. They can take possession of 
the concern and run it to suit themselves ; but they have 
no further claims against the individual stockholders. 
What is true of railroad stock is generally true of manu- 
facturing stock, and partially true of the stock of banks 
and of trading corporations. The liability of the indi- 
vidual shareholders is in each case accurately defined 
by statute. 

§ 160. It was with much reluctance that the system of 
Umited liability was admitted as an integral part of cor- 
poration law. It seemed like an attempt of the investors 
to secure large profits from an enterprise without assum- 
ing corresponding liabilities. But the experience of coun- 
tries like Great Britain or states like Massachusetts, which 
strove to restrict the introduction of limited liability, 
proved that this conservatism was either unwise or un- 
just : unwise, so far as it prevented investments of capital 
on a scale which the community required in order to 
utilize modern improvements in the arts ; unjust, because 



146 INVESTMENT OF CAPITAL. 

in the dealings of large concerns the creditors were in a 
better position to prevent the creation of bad debts than 
were the individual shareholders. The experiences in the 
City of Glasgow Bank failure in 1878, which reduced to 
penury a number of small investors who had no possible 
control over the affairs of the bank or moral responsibility 
for its management, were sufificient to prove to the most 
conservative how ill adapted was the old system to the 
conditions of modern investment. 

As the need of permanent improvements gave shape to 
the system of land tenure, so the need of concentration 
of capital gave shape to corporation law. When a hun- 
dred men putting their capital together could do much 
more for society than if they kept it separate, it was 
necessary to devise some system which should make it 
easy and safe for them to unite. The modern corpora- 
tion, combining as it does the principles of perpetual suc- 
cession, representative government, and limited liability, 
has met the industrial needs of the case. The feature 
of perpetual succession prevents any loss of continuity in 
operation when one of the shareholders dies or transfers 
his interest. The feature of representative government 
allows the different shareholders to choose a board of 
directors small enough in number to secure efificiency of 
control and operation. The feature of limited liability, 
whereby each shareholder is responsible for the debts 
of the concern only to the extent of his original hold- 
ing, protects him from losses due to the misconduct 
of other shareholders, which the large size of the corpo- 
rate body makes him unable to control. The union of all 
these features allows the public to secure the economy 
resulting from large accumulations of capital limited 
neither by the lifetime of a few individuals nor by the 
extent of their private fortunes. 

§ 161. These institutions and the motives connected 
with them have served their purpose so' fully that in 



OVERPRODUCTION OF MACHINERY. 147 

modern times we are quite as apt to find an excess in the 
saving and investment of capital as to find a deficiency. 

In the beginnings of civilization scarcity of capital is a 
most serious and imminent economic danger. Under such 
conditions anything which will lead people to save and use 
their savings productively is good for society. But in more 
modern times, there is a temptation to invest capital in 
machinery to such a degree as to reduce the demand for 
the products of machinery. If one man tries to save, and 
convert his capital into permanent investments, he can do 
so ; but if every one tries to save, a great many people will 
fail to realize their expected profit because of an over-pro- 
duction of machinery. It is in this way, rather than by a 
fall in the rate of interest, that the effect of over-accumu- 
lation of capital shows itself most conspicuously. This 
mistaken investment proves a loss to society as well as to 
the individuals immediately concerned. In a given stage 
of the arts, and with given habits of consumption, a certain 
amount of machinery can be advantageously utilized ; a 
larger amount than this is a waste. We have for generations 
been cultivating motives which should make individuals /, /,/ 
reduce their consumption and. increase their investment 
until we could obtain the required amount ; and we have 
apparently overdone the matter. It is certain that the 

increased utilization of existing capital which follows any ^ 

stimulus to consumption is apt to be more conducive to ^^,x^^^^-.,j;,^^ 
general prosperity, than a corresponding increase in the f^u.,^-' 
amount of investment without such stimulus. A super- ^;;^uu«!«^ 
ficial observation of this fact leads many people to adopt jt'i^^^-^—" 
means of stimulating consumption which are transient in'.*'^'*^^* 
their nature, and which provoke a reaction which makes 
matters worse in the end than they were at the beginning 
Currency inflation may serve as a type of such means. 
The danger of measures like this is greatly increased if 
the economist shuts his eyes to the small fraction of truth 
hidden amid larger fractions of error in the arguments of 



148 INVESTMENT OF CAPITAL. 

their advocates. The modern civihzed world is in per- 
petual danger of under-consumption. Too many of its 
members use their supplies of products, not to purchase 
the consumable products of others, but to duplicate ma- 
chinery and other permanent investments. Under the 
operation of the credit system the danger in the process 
remains unseen, until masses of such machinery come into 
use ; then its comparative worthlessness becomes ap- 
parent. The men who own it find themselves poor 
instead of rich. The laborers who have been trained 
to produce it are thrown out of employment, and the 
community is plunged into a commercial crisis (ch. ix). 

§ 162. The historical study of the origin and develop- 
ment of capital in its various forms may guard us against 
several rather prevalent fallacies. 

In the first place we must beware of treating rights to 

land, or to the management of corporate property, as 

" absolute " or " natural " ones. This danger is not so 

great now as it was a century ago, for political science 

makes far less of natural rights than it once did. But 

enough of the old view remains ' to make it worth while 

to emphasize the fact that the various institutions under 

which capital is invested have been sanctioned by society 

^ A curious aftermath of the old theories of natural right is seen in some 
of the modern theories of natural value. Labor, land, and capital are re- 
garded as co-operating in production, and an attempt is made to deter- 
mine the natural share of the product which each factor obtains by free 
competition, under the assumption of a certain normal degree of intelligence 
in the investment of capital and development of land. But this is a thing 
which we cannot assume ; and it is precisely because we cannot assume it, 
that the various institutions described in the foregoing chapter are tolerated. 
Interest and rent and the different forms of monopoly gain have grown up as 
means of enabling the community to make progress by the elimination of 
investors of lower degrees of intelligence and the substitution of better ones. 
The habits of mind which determine the relative value of present and future 
goods are so bound up with these institutions and these differences of intelli- 
gence, that reasonings based upon the continuance of present methods of 
valuation apart from existing institutions and their historical causes, seem at 
once hazardous and unprofitable. 



EXPROPRIA TION. 1 49 

for the sake of their effect on the public well-being ; and 
that they derive their efBcacy from this sanction. When 
they stand in the way of progress, society does not hesi- 
tate to modify or limit them. The power of expropria- 
tion, based on the right of " eminent domain " inherent 
in the people, furnishes a conspicuous instance of such 
limitation. If a man uses his land tenure to stand in the 
way of public improvement, the government arranges a 
process by which his land can be taken from him, whether 
he will or no ; saying that the community has rights to 
such property which, in case of necessity, override the 
individual will. In like manner, if a corporation uses its 
authority to harm the community which depends on its 
services, the government brings its " reserved police 
power " into play to check such abuses of authority. It 
is perfectly clear that in case of public necessity private 
property may be taken by the state, always providing 
that " due process of law" is used and compensation 
given to the owners. 

§ 163. A little study of this idea of compensation will 
show us how much less absolute (if such a phrase may 
be permitted) are the rights of capital than the more gen- 
eral right of property. Any considerable impairment of 
the right of property would involve a change in the whole 
industrial system, and even in the moral system on which 
society is organized. Property-right is the chief modern 
motive to labor, to care, and to avoidance of waste and 
destruction. Rights of capital, however important or 
beneficial in their effects, are much narrower in their 
scope. They affect the methods of management of in- 
dustry, rather than the motives on which all industry is 
based. They can be seriously modified without changing 
the general substructure of society. There can be no 
reasonable doubt that they will be thus modified as better 
methods are found to take their place. 

§ 164. But it is a much more serious error to go to 



150 INVESTMENT OF CAPITAL. 

the other extreme, and assume that they can be modified 
at will by the action of organized force. The fact that 
the present organization of capital is the result of histori- 
cal development, and that present forms have survived 
while others failed, is the strongest proof of their vitality. 
George's argument that collective property in land is per- 
fectly practicable because so many races have tried it and 
given it up, is but the reductio ad absurduin of many 
attacks on the present industrial system. While it is un- 
doubtedly true that the various rights of the capitalist 
depend upon the existence of a civilized society which 
maintains them, it seems equally true that the existence 
of a civilized society in the stress of the struggle for exist- 
ence among different members of the human race depends, 
for the present at any rate, upon maintaining the rights 
of the capitalist. 



CHAPTER VI. 

COMBINATION OF CAPITAL. 

Modem Tendencies toward Monopoly — Their Effect on Prices — Limitation 
of Profits — Laws Fixing Rates — Enforcement of Responsibility. 

- T. H. Farrer : " The State in its Relation to Trade." London, 1883. 

The general subject of monopoly is not adequately dealt with in economic 
literature — especially in book form. On railroads and railroad charges, 
mention may be made of C. F. Adams, " Railroads, their Origin and 
Problems," New York, 1878; A. T. Hadley, "Railroad Transportation, 
its History and its Laws," New York, 1885; W. D. Dabney, "The 
Public Regulation of Railways," New York, 1889 ; W. M. Acworth, "The 
Railways and the Traders," London, i8gi ; and, above all, of G. Cohn, 
" Untersuchungen iiber die Englische Eisenbahnpolitik, " Leipzig, 1874, 
1875, 1883. The third volume of Cohn gives the best general investigation 
of the principles regulating monopoly price. Compare also the fifth book 
of A. Marshall, "Principles of Economics," 3d ed., London, 1895. 

For further references on closely allied subjects see chapter xi. 

§ 165. The investment of fixed capital described in the 
preceding chapter has wrought much more radical changes 
in manufactures and transportation than in agriculture. 

There are several reasons for this difference. In the 
first place, the productiveness of factories has increased 
faster than that of farms. No means has been found for 
indefinitely enlarging the amount of food which can be 
obtained from a given area. We can perhaps double it or 
treble it ; but no investment of capital, wise or unwise, is 
likely to increase it a hundred-fold. Therefore no one 
farm, however large, is likely to supply more than a very 
small fraction of the world's consumption. Until there 
is some radical change in the art of food production, we 

151 



152 COMBINATION OF CAPITAL. 

shall continue to have competition between different 
producers. Nor has the investment of fixed capital in 
agriculture gone so far that its interest and maintenance 
constitute the chief elements in the cost of food pro- 
ducts. They form an important, but not a dominant 
factor. Under these circumstances, the theory of normal 
price, though hindered in its operation, is by no means 
rendered inapplicable. There is a slight delay in the 
adjustment between price and cost ; there is a certain 
margin between the price which will induce new com- 
petitors to enter the field, and that which will drive out 
the old ones. But, in the majority of cases, we can still 
rely on competition to protect the consumers and do no 
gross injustice to the producers. 

§ 166. In manufactures the case is different. The units 
of capital are much larger. Each producer can extend 
his output with a gain rather than a loss in economy. If 
he can increase his sales, there will be only a slight in- 
crease — perhaps none at all — -in the expense for wages 
and materials and a decided decrease in the share of the 
charges on fixed capital, which each unit of product must 
pay. There is no fixed standard of cost whjchjwe can 
treat as the normal price ; for the cost per unit of product 
depends on the quantity sold, falling as sales increase. 

The price which will induce new competitors to enter 
the field is also much higher than that which will lead 
old ones to withdraw. No concern will quit competition 
as long as it can pay an appreciable part of its interest 
charges. It is better to lose part of your interest on 
every piece of goods you sell, than to lose the whole of 
it on every piece you do not sell. As long as the price 
received more than covers the expense for wages and mate- 
rials each of the old factories will continue to compete. 
Even if it changes ownership by foreclosure it will remain 
in operation. But, on the other hand, no new competitor 
will be called into being unless the price is high enough 



CONDITIONS WHICH PROMOTE IT. 1 53 

to afford a liberal profit, after paying interest, mainte- 
nance, and other charges on fixed capital invested under 
modern methods. Thus prices, instead of constantly , 
t ending to gravitate toward an equitable figure, oscillate '' 
between two extremes. The rate of production, at figures 
whicH give a fair profit, is usually eitherjnuchjarger than 
the rate of consumption, or muc h smaller.^ In the former 
case, prices are unremunerative and unjust to the pro- 
ducer; in the latter case, they are oppressive to the con- 
sumer. The average price resulting from such fluctuations 
may perhaps be a fair one ; but the wide changes of price 
are disastrous to all parties concerned, 

§ 167. The failure of competition to secure fair or 
stable rates gives additional force to the pressure toward 
combination which always exists among certain classes of 
business men. 

Many writers on combination treat it as a new thing, 
peculiar to the present stage of commercial and industrial 
development. This is a mistake. Efforts at trade com- 
bination have always been made, and have not infre- 
quently been successful. The more we study the past 
history of any line of business, the more we are impressed 
with the extent of such efforts at combination. The dis- 
tinctive feature of the present age lies in the existence of 
certain added causes peculiar to this stage of commercial 
development, which work in favor of those who advocate 
combination, and make it harder for independent competi- 
tors to resist it, or for the law to prohibit it on grounds 
of public policy. 

§ 168. The economy, to the public as well as to the indi- 
vidual, of concentrating capital as much as possible, always 
furnishes a pretext, and sometimes a real reason, for sub- 
stituting combination for competition. In some cases the 
industrial units which are necessary for proper utilization 
of labor have become so large as to produce actual mo- 
nopoly. This is especially true of distributive services, 



\y iX 



154 COMBINATION OF CAPITAL. 

like water, gas, telegraphs, or railroads. The attempt to 
have two independent agencies perform any of these 
services for a single community is apt to result in loss to 
the producer and inconvenience to the consumer. So 
much of the expense of delivery of water or gas is con- 
nected with the laying of mains, that a system which dupli- 
cates these mains is a public burden. So much of the 
advantage of the telephone service to each subscriber lies 
in the power of reaching all the other subscribers, that 
the existence of two competing exchanges in the same 
city destroys the usefulness of both. In railroad trans- 
portation a single organized company can put lines just 
where they are needed, and run trains at the time when 
the public wants them. If the same service is performed 
by two companies, there will be unnecessary duplication 
of lines in some places, and failure to build needful ones 
in others ; while the train times and train connections will 
be arranged, not with regard to the maximum convenience 
of the public, but with a view to increase the business of 
one competitor at the expense of the other. Even in cases 
where the necessity for concentrated management is not 
quite so marked as in those just described, the competi- 
tion of different concerns always involves a loss, from the 
need of maintaining too many selling agencies, the ex- 
pense of unnecessary advertising, and the lack of proper 
utilization of fixed capital.* 

. * The increasing profit when we enlarge the output of a factory is often 
contrasted with the diminishing profit when we attempt to do the same thing 
on a farm ; and some writers say that industries with large fixed capital are 
subject to a "law of increasing return" which contrasts with the law of 
diminishing return that prevails in agriculture. This statement hardly goes 
to the root of the matter. The distinction is not so much between kinds of 
industry as between kinds of capital^ With a given amount of fixed capital, 
whether invested in agriculture or in manufactures, any increase of output 
diminishes the charges on such capital per unit of product. The current 
expenses per unit of product do not thus tend to diminish as the output in- 
creases ; in fact, when a certain relation has been established between out- 



AGREEMENT TO MAINTAIN RATES. 1 5.5 

§ 169. The simplest form of combination is an agree- 
ment to maintain rates, where the several competitors 
promise not to reduce their prices below a scale fixed by 
common consent, with a view to giving producers a fair 
profit. But such an arrangement rarely proves effective. 
Each company is at the mercy of its agents. They will 
try to steal business from rival concerns by cutting rates. 
If they are allowed a commission on sales, they will divide 
it with the buyer ; if they are not allowed such a commis- 
sion, they will find a hundred different ways, less obvious 
but hardly less effective, of rendering a rate agreement 
nugatory. It is so profitable for one concern to steal busi- 
ness from another, and so disastrous to its rival to lose 
the business, that the latter will always suspect the former 
of bad faith when any irregularities of its agents are dis- 
covered or surmised. Acontest will be inaugurated which 
tends to drive prices far below the normal rate ; usually 
to the advantage of those who least need and least deserve 
such reductions. The honest and straightforward business 
man is content with the one-price system. He is not seek- 
ing to gain an unfair advantage over his neighbor, but to 
be treated squarely. Fluctuating and uncertain rates are 
not what he desires, for he knows that his less scrupulous 
rival will be the first to gain the benefit of such changes. 
It is better for A to be paying 30 cents and be sure that 



put and fixed capital, the current expenses per unit of product increase very 
rapidly. Whether, with an increase of output, the gain from fuller use of 
fixed capital offsets the loss from increased current expenses, depends partly 
on the amount of the fixed capital, but chiefly on the degree to which it was 
previously utilized. If it was not fully utilized we shall see the phenomena 
of increasing return ; if it was already fully utilized, we shall see those of 
diminishing return. The apparent contrast between agriculture and manu- 
facturing in this respect is chiefly due to the fact that population habitually 
approaches a limit set by the arts of food production, so that its agricultural 
improvements are always employed nearly to the limit of profitable output ; 
while in manufactures there is no such increase of demand, and fixed capital 
is often quite inadequately employed. 



156 COMBINATION OF CAPITAL. 

his competitor B is also paying 30 cents, than for A to 
pay 25 cents when B pays 20. Wars of rates, though 
they produce very low prices, generally work to the dis- 
advantage of the honest purchasing public and to the 
advantage of the shrewder speculators. 

§ 170. A single instance will serve to illustrate the diffi- 
culty of maintaining rates by agreement. Twenty-five 
years ago a fair rate for cattle from Chicago to New York 
was about $110 a carload. If the large shippers of cattle 
wished to break this rate, they would drive all their steers 
to one of the competing lines and would spread a rumor 
in the commercial columns of the newspapers that this 
line was not maintaining rates. This rumor, combined 
with the fact that the line in question was getting all the 
shipments, would make the other lines think there was 
foul play, and lead them to order a reduction in rates to 
meet the supposed cut. As soon as any such reduction 
was announced the shippers would all divert their cattle 
to the lines that had made it. The road that was carry- 
ing everything yesterday received nothing to-day ; and 
indignant at the bad faith on the part of its rivals it would 
meet their reduction by a yet larger reduction. To this 
process there was no limit as long as the price paid for the 
carriage of cattle more than covered the expenses of load- 
ing and hauling. Under the excitement of the contest the 
railroad agents sometimes went even lower than this, and 
carried cattle at an actual loss in order to prevent rivals 
from making a profit. 

§ 171. When competing concerns are thus at the mercy 
of their agents or of outsiders, a resort to closer forms of 
combination is inevitable. If it proves that an agreement 
to maintain rates is not enough, they will arrange a pool 
or division of traffic. Pools take three distinct forms. 
Sometimes rival concerns divide the field ; as when com- 
peting gas companies agree to serve different streets in the 
same city, or when competing railroads agree not to build 



DIVISION OF TRAFFIC. 1 5/ 

branch lines into one another's territory. Sometimes 
they divide the traffic itself. If three railroads find that 
each has done an approximately equal 'amount of busi- 
ness during the year preceding, they may arrange to divide 
the competitive business equally, and let each company 
take one-third. If more than one-third of the shippers 
desire to use one of the three lines during the coming 
month, that line agrees to turn over a part of its business 
to one of its rivals. If the different railroads are not of 
equal importance, the traffic can be divided on the basis 
of the percentages actually carried during the previous 
period of competition. Sometimes the railroad which is 
less favorably situated has to make concessions in rates in 
order to secure any traffic at all. In this case it is allowed 
to charge a lower price than its rivals, and receives a per- 
centage of traffic at this lower rate. Such a concession is 
called a differential rate in favor of the weaker line, and is 
used as a means of inducing it not to enter into cutthroat 
competition. Sometimes, instead of dividing the traffic, 
the competing concerns may divide the earnings from that 
traffic, having a common accounting office and perhaps*a 
system of joint agencies connected with it. 

These divisions of traffic or earnings are far harder to 
arrange than agreements as to rates, but, when once 
established, they are much more effective. For when 
such a division exists, any irregularities of the agents in 
the matter of rates hurt the company which they repre- 
sent far more than its rivals. This arrangement, there- 
fore, substitutes mutual confidence for mutual suspicion, 

§ 172. Pools have not been regarded with favor by the 
law.' In the United States they are treated as contracts 

^ In England the legal decisions are much more favorable to pools than in 
the United States ; while in most parts of Continental Europe they are ac- 
cepted as matters of course ; the governments themselves entering into pool- 
ing contracts with private companies with which they find themselves 
brought into competition in the management of state railroads or other 
industrial enterprises. 



158 COMBINATION OF CAPITAL. 

in restraint of trade, and therefore void as a gambling con- 
tract would be void. The courts say that they are against 
public policy and will not aid in their enforcement. 

In certain kinds of business, notably railroad transpor- 
tation, such pools or combinations are treated as misde- 
meanors, and attempts are made to punish their promoters 
by fine or imprisonment. But these efforts to do away 
with pools have conspicuously failed of their object- 
There are many ways of evading them. A joint account- 
ing office may take the form of a clearing house estab- 
lished for the convenience of the public, and yet may 
serve all the purposes of a pool. If competing companies 
are forbidden to divide traffic by contract, they may 
secure a permanent understanding by putting a majority 
of their stock into the hands of a common board of trus- 
tees. Such an arrangement is known as a trust. The 
stockholders, in thus putting their securities in trust, part 
with the voting power, — that is to say, the power of 
directing the policy of the concern, — retaining the right 
to receive whatever may be earned on their stock, while 
it is held in trust by a board that secures harmony of 
management between the different companies engaged. 
If trusts are prohibited, it is always possible to resort to 
actual consolidation ; the only serious difficulty being 
that a large consolidated company is liable to be taxed 
on the whole of its capital stock in a number of different 
states. It was this difficulty which the trust agreement 
was primarily designed to evade. As tax legislation be- 
comes more systematic, the trouble from this source 
becomes less, and the possibility of consolidation is 
decidedly increased. 

§ 173. The attempt to prohibit combination has proved 
futile, and has simply driven the competing concerns into 
closer consolidation. Had it been successful, it must 
either have retarded the development of modern business 
and the utilization of modern methods requiring concen- 



MISTAKES OF COMMERCIAL POLICY. 1 59 

trated management of capital, or it must have subjected 
all of our large industries to constant fluctuations in their 
scale of prices, which would have been hardly less disas- 
trous to the consumer than to the investor. 

But the advantages of industrial combination, when it 
comes to include all competitors, are frequently balanced 
by the evils of commercial combination. The economy 
connected with the use of concentrated capital is in some 
measure offset by the loss of that stimulus which compe- 
tition alone seems able to give ; and the resulting 
monopoly makes it uncertain whether the consumers 
will get the benefit of the economy which is actually ob- 
tained. 

§ 174. If a monopoly is managed by inexperienced 
hands the effort to put prices up is usually more notice- 
able than the effort to put expenses down. It seems so 
easy to make a profit at the expense of society, that man- 
agers are apt to neglect the more laborious method of 
making a profit by service to society. When business 
men have been all their lives accustomed to face imme- 
diate competition, they think that the combination of all 
competitors removes the only effective restriction upon 
charges. But this is a short-sighted view of the matter 
which has wrecked most of the enterprises run on such a 
basis, and has made the average trade combination a 
means of hindering rather that helping its members. 

If the managers of a combination make it their chief 
concern to suppress competition rather than to realize 
economies in production, their policy toward trade 
rivals results in violation of commercial morality, if 
not of commercial law. Not content with obtaining 
unfair advantages in the way of discriminating rates 
for transportation of its goods, the combination tries 
to exclude its rivals from their accustomed markets by 
methods of boycotting and intimidation, which, when 
they are used by trades-unions, provoke fierce denuncia- 



l6o COMBINATION OF CAPITAL, 

tion from the same men who have been ready to practise 
them for their own advantage/ 

Even among those combinations which, Hke the Stand- 
ard Oil Company, have reahzed economies and reduced 
rates for their product, this unscrupulous policy toward 
competitors has been carried to such an extent as to 
create a just prejudice against them ; a prejudice which is 
enough to explain, and in one sense to justify, the ten- 
dency on the part of the public to ignore or depreciate 
the industrial services which they have actually rendered. 

§ 175. There is one case, and one only, where a 
monopoly has almost unlimited power to make high 
charges. If a number of contracts must be fulfilled 
within a specified time, a combination which controls the 
matter which is made the subject of these contracts can 
fix prices to suit itself, limited only by the danger of 
driving the contracting parties into bankruptcy.^ 

If operators have sold for future delivery stock which 
they did not own, or have contracted to deliver wheat 
during a certain month without assuring themselves of 
their sources of supply, the owners of the stock or of the 
wheat can, by a sufficiently extensive combination, force 
the operators to pay what price they please. Such a 
combination is known as a corner. Its managers have 
a great advantage in not being compelled to control the 
supply for more than a limited period, and of being 
assured of a fixed demand during that time. But the 
number of successful corners is less than is commonly 
supposed. Though the apparent profits of such an oper- 
ation are often large, the expenses of securing control of 
the whole supply, and the difficulty of selling it to advan- 

' It is interesting to see how combinations of capital and combinations of 
labor are subject to the same possibilities of abuse or mismanagement ; and 
how the same violation of commercial right looks excusable to the party 
benefited, but monstrous to the party injured. 

* Or by special rules of particular exchanges framed to avoid such a 
result. 



REASONS FOR REDUCING RATES. l6l 

tage upon the expiration of the corner, make the real 
gains less than the apparent ones. ,.^ 

§ 176. If the article is to be sold to consumers instead 
of to speculators who have made fixed contracts, the I 
chance for financial success by a policy of exorbitant ( 
prices is very small indeed. We have seen in chapter iii 
that the demand for an article falls as the price rises. In 
the case of almost everything except necessary food sup- 
plies, this fall in demand is very rapid, so that the gross 
receipts of the sellers under a high charge are less than 
those which they obtain with the lower scale of prices. 
Under these circumstances the maximum gross income is 
obtained by making rates low enough to develop a good 
volume of traffic, instead of by raising them so high as to 
reduce that traffic to a small amount. If a concern uses 
a large amount of fixed capital, it will rarely happen that 
the most money can be made by a policy of high charges 
with small volume of business. Experience has shown 
that the opposite method is the one which has proved 
permanently profitable, even to the concerns whose mo- 
nopoly seemed most assured. It pays in the long rua 
to bring rates down very near to the limits of actual cost,, 
if such reductions are followed by a large development 
of traffic. 

§ 177. Where a monopoly is of such precarious charac- 
ter that it may be subjected to direct competition at 
almost any moment, this truth is-sufficiently obvious. If \ 
a concern in this situation attempts to do a small busi- | 
ness at high rates and make large temporary profits by 
such a policy, new capital will come into the business in 
the hope of securing the good-will and custom of the 
community by lower rates. High charges invite dupli- | 
cation of plant in all cases where such duplication is pos- ' 
sible. If, on the other hand, the original concern adopts 
a policy of doing a large business at low rates, the 
promoters of a rival enterprise will soon see that they 



1 62 COMBINATION OF CAPITAL. 

cannot hope either to do the business cheaper, or to make 
a satisfactory profit on that moderate fraction of the 
existing business which it is possible for a new competitor 
to secure without special concessions in rates. 

§ 178. Even where a monopoly does not fear direct 
competition, there are many cases where it is subjected 
to similar restraints in an indirect manner. If there 
is but one railroad in a certain section of country, and 
this has a monopoly of available routes for reaching the 
market which the producers of the district naturally seek, 
the shippers are apparently at the mercy of that company 
and its agents. But if there is another railroad line 
which supplies the same market with goods from another 
section, it is all but inevitable that the competition of the 
two districts with one another should regulate the price 
which the railroads can charge.^ We cannot have two 
different prices for similar goods in the same market. If 
the supply and demand of wheat at Liverpool fixes the 
price of wheat in the Liverpool market at a certain rate 
per bushel, the railroad and steamship lines in every 
-direction must make their charges such that the wheat 
producers, in the sections which they can serve, can ship 
their supplies at a profit. Some of the transportation 
agents may disregard this necessity for a year or two, but 
not permanently. The penalty for such disregard is the 
destruction of the trafific on which the transportation 
route makes its living. The railroads of the United States, 
of Russia, and of British India feel one another's com- 
petition in determining the prices which they can charge 
on their international trafific. 

§ 179. There are a few cases where the monopoly of 
the sources of supply is so complete that even this possi- 

• When permanent monopoly rights are guaranteed by law in all the 
competing districts, as on French railroads, we are apt to find a system of 
high charges which no nominal powers of public supervision prove adequate 
to control. 



LARGE CONSUMPTION INDISPENSABLE. 1 63 

bility of indirect competition is absent. A private com- 
pany may thus control all the available water within 
reach of a large city. A great industrial combination like 
the Standard Oil Company may become the sole means 
of supplying certain grades of oil to the United States, 
or even to the world. Here it might seem as though the 
power to make high charges were absolutely unlimited.^ 
Yet, even in these cases, the self-interest of the producers 
dictates the adoption of a relatively low scale of prices. 
Such monopolies can, as a rule, only be secured by very 
large investments of capital. Adequate profit on these 
investments involves correspondingly large public con- 
sumption. A man whose facilities are so rude that he 
makes only a few articles in the course of a year and sup- 
plies but a small part of the public demand, is interested 
in having the price of those articles as high as possible. 
But the man who makes a great many articles in the 
course of a year and meets a large part of the public de- 
mand is primarily interested, not in getting a maximum 
price for a few things, but in getting the public to take a 
great many things. Among those trusts and other com- 
binations that have had apparently a complete monopoly, 
a large number have made conspicuous failures, simply 
because they thought of high prices rather than large 
sales, and did not see that such a policy was suicidal. 

§ 180. Perhaps the most striking illustration of this 
truth is furnished by the history of the French copper 
syndicate of 1888. By a series of brilliant financial opera- 
tions, this syndicate obtained control of the copper pro- 
duct of all the best mines of the world. It attempted to 
raise the price of copper from nine cents a pound to six- 
teen cents. Everything was apparently favorable to the 
success of these operations. Copper was a necessity for 
use in the arts ; the sources of supply where copper could 
be produced cheaply were few in number, and the syndi- 
cate had exclusive contracts with them all. The demand 



164 COMBINATION OF CAPITAL. 

for copper was constantly tending to increase, owing to 
the new uses of electricity. The syndicate itself had very 
large capital, and was supported by many of the strongest 
financial houses of Europe. Yet with all these things in 
its favor it failed disastrously, because the consumption of 
copper at the advanced prices shrunk to such a degree 
that all the calculations of the syndicate were deranged 
and its financial resources put to a strain which they 
could not stand. Even the strongest of monopolies must 
make its price low enough to cause the public to buy 
its goods or services to a sufifiicient extent to utilize its 
capital, and this price will usually be found to be nearly 
the same as that which would have been fixed by free 
competition. 

§ 181. If a large industrial combination uses the advan- 
tages given by concentration of capital to render labor 
more efficient and obtain a good profit at low rates, it 
has excellent chances of success. But if it makes such 
economy of labor a pretext instead of an object, and uses 
its monopoly to put prices up, the danger of failure is 
wholly disproportionate to the chances of success. Such 
a policy may succeed for a few years, but sooner or later 
it seems bound to ruin those who adopt it. 

Gan we trust the managers of our large industrial enter- 
prises to see this for themselves ? Can we treat their 
mistakes as a self-correcting evil, and wait quietly for the 
time when they shall learn that their own permanent in- 
terests are best served by doing good public service ? To 
this question it is impossible to return a general answer. 
Our decision in any particular case will depend partly 
upon the character of the business involved, partly upon 
the intelligence of those who manage it, and most of all^ 
perhaps, on our own habits of mind. 

§ 182. If we are in the habit of looking at direct con- 
sequences, and disregarding indirect ones, we shall see 
grounds for active public interference in almost all cases 



DIFFERENT VIEWS OF STATE CONTROL. 1 65 

of industrial combination. The managers of a monopoly 
have it in their power to do a great deal of harm before 
they begin to feel the loss to themselves which arises 
from the adoption of 2, short-sighted policy. Even if the 
trouble corrects itself in the long run, a great many legiti- 
mate interests are sacrificed in the process. A railroad 
ultimately finds it suicidal to kill the local shippers who 
are its best permanent customers ; but it is small comfort 
to the shippers to know that their deaths are to be slowly 
avenged by the operation of economic laws. The ship- 
pers demand some immediate control over the railroad 
agent ; something which will prevent the evil in the 
beginning, instead of simply sufficing to prevent its in- 
definite repetition. They will be prone to adopt the 
socialistic solution of the problem, and insist that the 
government should own the railroad, as the surest means 
of avoiding such abuses. 

But the man who is in the habit of looking at indirect 
consequences will see that the undiscriminating attempt 
to prevent evil often results in preventing an even greater 
amount of good. He will be prone to take the individu- 
alistic view of the matter. He will be disinclined, except 
as a last resort, to put the business into the hands of a 
government whose agents are almost always chosen on 
other grounds than those of industrial efficiency, and 
whose methods are much less flexible than those of a pri- 
vate corporation. He will be indisposed to see stringent 
regulations put in force until he is convinced that milder 
remedies are inadequate to protect the interests of the 
public as a whole. 

§ 183. The industrial and political conditions which de- 
termine whether the conduct of a business may advan- 
tageously be entrusted to the government instead of 
being delegated to the property owners, are discussed at 
length in chapter xii. We have here to consider the 
merits of various methods of regulation of such Indus- 



l66 COMBINATION OF CAPITAL. 

tries, where government ownership proves undesirable 
or impracticable. These may be grouped under three 
heads : 

1. Limitation of profits. 

2. Fixing of rates by public authority. 

3. Enforcement of far-sighted methods of management. 
§ 184. The first of these methods looks much better 

than it really is. It is a favorite remedy with people who 

have had no practical experience of its working. They 

say that it is very unjust for a monopoly to obtain a 

much higher dividend than would be possible under free 

competition ; and they think that if we limit the dividend 

we shall remove the motive for extortion. In practice 

v/* the matter does not work in this way. Laws limiting 1 

V , profits, if obeyed, tend to keep rates high instead of low; 

W" if evaded, they substitute a crooked method of distribution 

for a straight one. 

If a company is selling gas at $1.50 a thousand feet, 
it indicates that this is the price which furnishes the 
maximum profit. A higher rate would lessen this profit 
by limiting consumption ; a lower rate would lessen it by 
making the margin above expenses too narrow. If the 
cost of making the gas is $1.00 a thousand feet, and the 
consumption will be 10,000,000 at $1.75, 20,000,000 at 
$1.50, and 30,000,000 at $1.25, the profit at $1.75 would 
be $7,500, at $1.50 it would be $10,000, and at $1.25 
it would be $7,500. If the company were forbidden 
to divide $10,000 the price would be quite as likely 
to be kept up at $1.75 as to be reduced to $1.25. In 
fact, the higher figure would be very much the more 
probable one ; first, because it is on the whole easier 
for the officials of a company to handle a small business 
on a liberal margin of profit than a large business on a 
close one ; and second, because the actual rates charged 
almost always represent the result of a process of reduc- 
tion which has been going on for years, for the very 



FUTILITY OF LIMITING PROFITS. 167 

purpose of obtaining a maximum profit. If our large 
corporations were trying to raise their charges, limitation 
of profits might readily remove the temptation to such a 
policy. But this is not Avhat they are habitually doing. 
They are lowering their charges for the sake of possible 
profits. Take away the chance for increased profit and 
we destroy the motive for reductions in charge. -^ We in- 
vite corporations to pursue a conservative policy when a 
progressive one means better public service at cheaper 
rates. 

Lord Farrer, whose long experience as secretary of the 
Board of Trade gave him unique opportunities for observ- 
ing the effects of various methods of regulation practised 
in England, says that limitation of profits does not cause 
reduction in rates ; and that in trying to apply this prin- 
ciple Parliament has gone on a wrong tack and involved 
the country in a " maze of absurdities." 

§ 185. Besides hindering reductions of rates, limitation 
of profits also prevents the increased investment of capital 
which is the best guarantee of efficient public service. If it 
is impossible for a concern to make more than an ordinary 
rate of profit, there is no adequate motive offered to the 
investor to develop new facilities and introduce new 
methods. These experiments may turn out badly and 
involve loss. If the company is to be deprived of the 
special profit in case they turn out well, the motive for 
their introduction is taken away, and the public fails to 
secure the service which it might otherwise enjoy. 

§ 186. If laws limiting profits are evaded instead of 
being obeyed, the effects, though different in kind, are 
equally undesirable. It is easy to reduce profits by ex- 
travagance in management, or by giving officials large 
salaries. This does no good to the consumer, and posi- 
tive harm to the investor. Such laws may also be evaded 
by inflating the company's capital account : a practice 
known as stock-watering. If a corporation is allowed to 



1 68 COMBINATION OF CAPITAL. 

divide all the money that it makes, there is no temptation 
to honest managers to create a fictitious capital account. 
But if the dividends are arbitrarily limited to eight per 
cent when the company is really earning twelve, the 
directors are tempted to pretend that there has been an 
investment of capital one and one half times as great as 
has actually been expended. On the basis of this sup- 
posed investment they issue a stock dividend of fifty per 
cent. This is in common language, "water." It does not 
represent money actually paid in. By dividing eight per 
cent on the watered stock, they can put the real earnings 
of the company into the hands of the investors without 
direct conflict with the law, and sometimes without public 
knowledge of the actual nature of the transaction. 

The worst of the matter is that when the practice of 
stock-watering once becomes tolerated, it is indefinitely 
abused by those who are in a position to do so. If com- 
panies begin to issue fictitious capital, there is no limit to 
such issues. A false capital account gives opportunity 
for every kind of stock-speculation and for all sorts of 
illegitimate methods of control by financial operators. 
Many attempts have been made to prohibit stock-water- 
ing ; but as long as limitation of profits is attempted, 
there are enough honest men who are interested in the 
more defensible forms of stock-watering to render it 
almost impossible to detect and punish the indefensible 
ones. The evil from this source alone far outweighs any 
good that has ever been obtained by trying to limit divi- 
dends.' 

§ 187. By limiting rates instead of profits we have a 

somewhat more effective means of control. It has the 

^ Some charters, especially in England, try to combine limitation of profits 
with limitation of rates by providing that whenever the profit exceeds a 
specified percentage, the charges for services shall be correspondingly re- 
duced. Others (like those of the French railroads) provide that all dividends 
above a certain figure shall be shared with the government. Neither of 
these systems has won its way into general recognition. 



DIFFICULTY IN ESTIMATING COST. 1 69 

merit of aiming at the right target, whether it hits it or 
not. Its chief difficulties are connected with the com- 
plexity of the conditions affecting modern traffic. It is 
seldom possible to say what any specific piece of work really 
costs a large concern. The cost depends upon the amount 
of work done. The larger the investment of capital, the 
more complete is this dependence of cost upon quantity. 
Under the old system of hand labor it was possible to 
know with approximate accuracy the cost of a single pair 
of boots. It could be estimated by finding the commer- 
cial price of the material, and the time involved in sewing 
the boots. But under the modern system, when the boots 
are produced in a large factory, it is impossible to tell how 
much they cost, unless we know how many pairs the owners 
of that factory sell in the course of a year. If the annual 
charges of the factory for interest and maintenance are 
$10,000 a year, and 10,000 pairs of boots are manufac- 
tured in that time, every pair costs $[ over and above the 
price of the labor and materials involved. But if only 
5,000 pairs of boots are made, the proper charge under 
this head is $2 a pair ; while if 20,000 pairs are made, the 
charge may be reduced to 50 cents a pair. In fact, the 
chief means which a manufacturer possesses for reducing 
cost is to increase the number of his sales so as to make 
it possible to lower this item of expense. This is the 
really critical element in price determination^ in all cases 
where large amounts of capital are involved ; and it is 
precisely this which public authorities are unable to de- 
termine in advance, because it is essentially speculative 
in its character. Of course, the business men themselves 
have the same difficulty ; but they are experimenting with 
their own capital, at their own risk, and in lines where 
they have the maximum technical knowledge ; while the 
government authorities, dealing with the -capital of others 
and the results of others' experience, find themselves 
sorely perplexed. 



170 COMBINATION OF CAPITAL. 

§ 188. Among industrial monopolies, the case where 
these difficulties are least is probably that of water com- 
panies. The capital invested is known with a fair degree 
of accuracy. If the engineering work has been properly 
performed at the outset, it is comparatively easy to decide 
on the amount of annual repairs required. The water 
consumption can be predicted on the basis of population 
served. In the case of gas works the matter is rather 
more complicated. Fluctuations in the cost and quality 
of coal make a great difference in profits. New processes 
may be invented which will either increase possible econ- 
omy, or render a part of the old investment valueless. 
Other methods of lighting may conceivably be introduced, 
which will so far lessen the demand for gas as to deprive 
the shareholders of a large part of the permanent value 
of their property. In order to know the real profit we 
must deduct from the apparent profit a considerable sum 
to allow for the depreciation of the fixed capital ; a sum 
which in cases like this is not calculable with certainty. 
Under such circumstances the whole business becomes 
more speculative, and the possibility of prescribing fair 
rates less satisfactory. 

§ 189. These difficulties are yet more conspicuous in 
the matter of electric lighting, and in fact in all the com- 
mercial applications of electricity. With the possible ex- 
ception of the telegraph, there is no electrical industry in 
which we have even an approximate means of estimating 
the real profits from year to year. We have not had long 
enough experience to know what is a proper allowance to 
be made for depreciation. In some cases — notably that 
of the telephone — we do not as yet know the proper basis 
for the arrangement of charges. Shall telephone charges 
be based on the message, as in long-distance business, or 
on the instrument, as in the ordinary local business? The 
former is the more logical basis, but it involves decided 
difficulties. The public, in local telephone exchanges, 



APPORTIONMENT OF EXPENSES. I /I 

distinctly prefers the latter method. But if a company- 
charges by the instrument and not by the message, we are 
brought face to face with the remarkable fact that the ex- 
penses per unit increase with an increase in the volume of 
business done. In a town with only loo telephones in 
operation, the expense to the company per instrument and 
the rate which can be profitably charged is far less than 
in a city with looo instruments. In the one case, it need 
only be prepared to make ninety-nine connections for each 
subscriber ; in the other, it must arrange for nine hundred 
and ninety-nine. This will serve to illustrate the highly 
experimental character of the problem of rate-making in 
the newer forms of industry. It is difficult enough for 
the investors to find agents who can be trusted to experi- 
ment with property under these conditions. Still more 
diffcult is it to find public officials who can be trusted to 
experiment with other people's property. 

§ 190. It is in transportation service that the regulation 
of charges is most perplexing, because transportation 
agencies do a great many different kinds of work, and no 
rule has been found to decide how much of the expense 
of maintenance and interest may justly be charged to one 
kind rather than to another (§101). A railroad carries both 
freight and passengers. How are we to decide how large 
a part of the expense of maintaining the road in efficient 
condition shall be charged to passengers, and how much 
to freight ? If we attempt to apportion these charges on 
the basis of the number of trains of each class, we seem at 
first sight to obtain a fair basis of distribution. But if we 
make passenger rates high enough to pay their share of 
the general expenses of the road on this basis, it may 
happen that a great deal of passenger traffic will be lost. 
In that case such an adjustment of charges, however great 
the apparent equity, will hurt the road, the travellers who 
live on its line, and even the shippers of freight them- 
selves ; for if passenger rates kill passenger traffic, trans- 



1^2 COMBINATION OF CAPITAL. 

portation can only be had when the shippers of freight are 
prepared to bear the whole expense of maintaining the 
line instead of a part only. There is the same difficulty 
in making the further apportionment of charges between 
short-distance and long-distance traffic of the same kind, 
or between different consignments of freight that have the 
same weight but different commercial value.' 

§ 191. A private company solves the problem of appor- 
tionment by charging what the traffic will bear. If the 
maximum revenue can be obtained by fixing a high rate 
on cloth and a low rate on coal, the company adopts 
this policy. It argues, with much justice, that its own 
interests in this matter are substantially identical with 
those of the public. If cloth gives the maximum revenue 
at high rates, it shows that such rates do not burden the 
traffic. If coal gives the largest net revenue under a 
schedule which allows the company very little profit per 
ton, but very large tonnage, it shows that a low coal rate 
is needed in order to meet the public requirements. 
Rates are based on value of service not only in the tariffs 
of well managed private companies but in all effective 
schemes of public regulation. A turnpike company has 
been allowed to charge a pleasure wagon more than a 
freight wagon, not because the former involves greater 
cost of maintenance to the turnpike company, but because 
it could be compelled to pay more without destroying 
travel. But a public official has not at command the 

' The proposal to solve this difficulty by leaving different carriers free to 
run their trains over the track of any railroad company, if they vi'ill pay 
tolls to cover the interest and maintenance of the capital invested in the 
roadbed, ignores the chief difficulty of the case. The perplexing problems 
about regulation of rates vi^ould be felt in the apportionment of tolls. The 
assumption that the matter of tolls for the use of the track will be simple 
and can be easily dealt with, if separated from loading and movement ex- 
penses, is quite vinwarranted. It is just because of the difficulty connected 
with compensation for interest and maintenance of permanent way that a 
railroad problem exists at all. 



REGULATION OF RATES. 1/3 

means which a railroad agent can use in order to decide 
what the traffic will really bear. The agent can try ex- 
periments and see whether the column of business grows 
enough to justify reductions of rates. The legislature or 
commission can only guess at such a result in advance, 
without the chance of feeling its way by experiment.' 

§ 192. Of the means of transportation now controlled 
by private companies, street railroads offer the fewest 
difficulties to the legislator. Their rates of fare are 
almost always regulated either by custom or by law. 
This can usually be done without much injustice. If 
rates are fixed so low as to be unprofitable, the company 
can crowd its cars a little more. By putting enough 
persons on a car at almost any rate, however low, it is pos- 
sible to meet the running expenses of that car, and the 
fixed charges attaching to the track as a whole are com- 
paratively slight, because the city, in the great majority 
of instances, has given the right of way for nothing. 
Even in cable, electric, or elevated railroads, the condi- 
tions of traffic are far simpler than in a steam rail- 
road built for general purposes; the chief difficulty 
of fixing rates in all these cases being connected with 

' The price charged by a railroad for any service really consists of two 
parts — a fee and a tax. The former covers the direct or immediate expense 
of doing the particular service in question — expenses of billing, loading, 
hauling, etc. The latter contributes to the general expenses attaching to 
the road itself as a mass of fixed capital — interest, maintenance, and other 
costs which are not greatly affected by additions to the volume of business 
done. The railroad agent endeavors to make the aggregate amount of these 
contributions to the general expenses as large as possible ; for any excess of 
this total above such expenses constitutes the net profit of the road. If a 
reduction in rates increases gross earnings faster than' it increases expenses, 
it shows that the old tax was too high, and was defeating its own purpose by 
destroying traffic. The most profitable rate on any class of goods is the one 
where the product obtained by multiplying the amount of traffic secured into 
the profit per unit of traffic — i. e., the excess of price received above direct 
expense — is a maximum. The same rule which applies to railroad rates of 
course holds good of any other concern which has a monopoly of any species 
of traffic. 



174 COMBINATION OF CAPITAL. 

the uncertainty attaching to the depreciation account. 
(§ i88.) 

§ 193. In the case of steam railroads, the theoretical 
difficulties attaching to a just apportionment of rates are 
almost insuperable. If a government commission wishes 
to prescribe a schedule of rates, it must find what system 
of charge is adopted on other roads similarly situated, 
and whether those charges pay or do not pay a fair profit 
on the investment. But no two roads are just alike, and 
any commission is liable to make its schedule too high or 
too low, according to its personal bias. In countries like 
England, where the railroads are owned at home, and 
where their promoters have great influence with the legis- 
lature, such maxima are placed so high as to be inopera- 
tive. Where, on the contrary, a large part of the railroad 
stock is owned at a distance from the road itself, the 
legislature is tempted to fix the maximum rates too low 
and to leave the owners no opportunity for profitable 
work. The evil resulting from the latter alternative is 
worse than from the former. It was seen in the opera- 
tion of the Potter law in Wisconsin in 1874, where the 
maxima were placed at a figure that prevented the roads 
from earning interest or even maintenance. They were 
compelled to contract their service to such a degree that 
the development of the state was checked, and after two 
years' trial the very men who had been most anxious to 
pass the law were equally pressing in favor of its repeal. 
While few instances of railroad legislation have had as 
bad an effect as this, the temptation to exercise a short- 
sighted policy is always present when the legislature feels 
the urgent pressure of shippers for a reduction in rates 
and does not feel the claims of absentee owners for a fair 
return on their property. 

§ 194. Where state ownership is impracticable, and 
private enterprise short-sighted and extortionate, laws 
fixing rates may be the best available resource for the 



WHAT THE TRAFFIC WILL BEAR. 



1/5 



protection of the public ; but their operation is in almost 
all cases rather unsatisfactory. They subject the com- 
munity to the evils resulting from inequality of supply 
and demand, as described in chapter iii ; and the burden 
consequent upon these evils is apt to outweigh the good 
actually accomplished by the statute. 

§ 195. Less ambitious in their aims, but more successful 
in their practical results, have been the attempts to secure 
fair rates by insisting on far-sighted management in the 
affairs of monopolies. 

It cannot be too often repeated that it is not so much 
the character of a particular industry which creates an 
apparent conflict of interests between the investors and 
the public, as the want of foresight in the management of 
that industry. The principle of charging what the traffic 
will bear, adopted by our large corporations, is a good 
one ; it is only when it is made a pretext for charging 
what the traffic will not bear, that it gives rise to abuses. 
It depends largely upon the intelligence of the manage- 
ment whether it is used as a principle or abused as a 
pretence ; and intelligence in management is often a 
matter of slow growth. In the Middle Ages people 
thought it necessary to regulate by public authority the 
rates that bakers might charge for their services in making 
bread. They said that in the absence of such regulation 
the public baker had the rest of the community at his 
mercy. He could take advantage of the necessities of 
his customers to exact starvation prices. We have passed 
beyond this industrial stage. Our business men can look 
a week or a month ahead ; the baker can see that other 
bakers will take away his business unless he is guided by 
considerations of public policy. But we have not learned 
to look ten or twenty years ahead. The managers of our 
largest enterprises still invite competition by high rates 
instead of forestalling it by low ones, and still handicap 
their best customers by discrimination instead of develop- 



176 COMBINATION OF CAPITAL. 

ing their trade by equality of charges. The newer the 
industry, the greater is the danger of unnecessary conflicts 
between producers and consumers, and the need of apply- 
ing every agency to quicken public intelligence. 

§ 196. The power of the government may be so, exer- 
cised as either to hasten or to retard this educational 
process. Attempts to prescribe rates have a tendency to 
retard it ; and this is probably the severest positive evil 
connected with them. If, as so often happens, the results 
of such attempts prove unsatisfactory, the managers will 
impute all their OAvn shortcomings to the existence of a 
control which hampers them, and will not take tp heart 
the lessons which they might otherwise learn from mis- 
takes. 

On the other hand, the educational process may be 
stimulated by measures which secure greater publicity 
in the affairs of monopolies. Much of the apparent con- 
flict of interest between producers and consumers is due 
to misunderstanding on the part of each side as to the 
real needs of the other. This misunderstanding can be 
lessened, if not wholly avoided, by clear judicial opinions. 
A great deal of the influence exercised by English and 
American courts has been due to the fact that they placed 
economic principles before both sides in a non-partisan 
version and in an absolutely clear light. There is some 
danger that the bench will lose this influence, partly be- 
cause of the increasing complication of modern industry, 
which renders it difificult for a lawyer to understand the 
indirect economic effects of his decisions ; partly on ac- 
count of a somewhat dangerous doctrine of sovereignty, 
which is leading our courts to lay too much stress on pre- 
cedent and statute and too little on the common sense of 
the people. The authority of the court depends, not on 
the acts of the legislature, not even on uninterrupted tra- 
dition, but on the fact that it knows more than the parties 
between whom it is deciding and can see the consequences 



ADVISORY COMMISSIONS, IJ-J 

of different lines of action more clearly, as well as more 
impartially, than they can. 

§ 197. To meet the deficiency of technical knowledge, 
recourse is often had to special commissions of experts 
for impartial investigation of disputes. The Massachu- 
setts Railroad Commission is perhaps the best known 
example of this kind. In the days of its most successful 
operation it had practically no power except the power 
to report ; but its reports showed such a clear under- 
standing of the points at issue that they were accepted as 
authority by impartial men on both sides. The Inter- 
state Commerce Commission was in some respects mod- 
elled upon the Massachusetts commission, and such success 
as it has enjoyed has been based on its power of applying 
sound economic principles to difificult cases. It is true, 
though it sounds paradoxical, that the power of these 
commissions is lessened by increasing their powers. 
They are engaged in building up new laws, new tradi- 
tions, and new methods of business where it is absolutely 
essential that their reasoning should command the assent 
of clear-headed men on both sides. When they cease to 
rely on their reason and fall back on authority, they lose 
the educational power which is the source of their domi- 
nant influence. 

Another useful form of advisory commission is com- 
posed of local business men, or representatives of commer- 
cial and industrial organizations, who can give advice as 
to the probable effect of changes in rates. Without such 
advice a railroad agent (or a tariff committee composed 
exclusively of railroad men) is in danger of making reduc- 
tions, not where they are most needed, but where they 
are most clamorously called for. The system of local 
advisory boards has been most consistently applied in the 
German Empire ; and, though a little slow in its operation, 
seems to have much to recommend it. 

§ 198. The legislation which is most serviceable in giving 



178 COMBINATION OF CAPITAL. 

force to the decisions of such commissions and advisory- 
boards is that which prescribes publicity of rates. The 
most serious evils in connection with arbitrary manage- 
ment of monopolies have taken the form, not of attempts 
to oppress the public as a whole, but of attempts to make 
differences between different sections of the public and 
to charge the poor man more than the rich man. When 
these differences are brought prominently before the 
public eye, they often stop of themselves ; and the courts 
find comparatively little difificulty in dealing with those 
which persist. It may at times seem necessary to sup- 
plement these provisions with special statutes to secure 
equality, such as the " long and short haul " clause of the 
Interstate Commerce Act, which prohibits railroad com- 
panies from charging local business a higher aggregate 
rate than through business of the same sort ; but the 
good done by such acts is usually much less than their 
promoters have anticipated. Effective control must be 
sought in the application of general legal principles, rather 
than in special statutes. 

§ 199. Another means of securing far-sighted manage- 
ment is t?he enforcement of directors' responsibility. If 
those who are engaged in the actual management are 
striving to make the largest immediate income out of a 
concern, they will pursue an extremely short-sighted 
policy, destructive alike to customers and to investors. 
If, on the other hand, their interests are identified with 
the permanent profits of the company instead of the 
temporary ones, they will be almost certain to do well 
by the public. Anything which so increases the borrow- 
ing power of corporations or diminishes the liabilities of 
directors as to make it possible for them to speculate with 
other people's money, causes short-sighted and unintelli- 
gent use of monopoly powers. Whatever makes the 
director responsible to the investor, tends to make the 
whole corporation serve the public better in the long run. 



DIRECTORS' RESPONSIBILITY. lyg 

§ 200. If the managers of an enterprise are allowed to 
use other people's money while they risk comparatively 
little of their own, a number of serious evils will inevitably 
follow. They will persuade the public to engage in 
enterprises which are doomed to failure in advance, in 
the hope that they may themselves make a temporary 
profit out of their management, either in the form of 
large salaries or of lucrative personal contracts. Or 
they may so manipulate the finances of the companies 
which they control, as to make a personal profit out of 
fluctuations in the value of their securities. These possi- 
bilities form a temptation to waste the investors' private 
capital and, what is far worse, to misuse an appreciable 
part of the public capital. The former causes loss to the 
individual investors directly concerned ; the latter affects 
the whole community, consumers as well as investors, by 
preventing the national resources from being properly 
utilized. This danger is most inadequately met in the 
United States. There are few localities where either law 
or public sentiment does much to check it. In this 
respect America is far behind other countries. In most 
parts of Europe, these evils are avoided or mitigated by 
holding the promoters of new concerns responsible for the 
correctness of their indications, and by making it a crime 
for them to divert the money of investors to their own 
uses by lucrative private contracts. In England these 
laws are backed by a public sentiment which looks on 
the position of a director or an ofificial of a corporation 
as one of trust, and which unsparingly condemns every 
attempt to use such a place for personal aggrandizement 
at the expense of the investor. But in the United 
States the legal responsibility is inadequate, and the 
public sentiment even more so. Perhaps the most seri- 
ous among all the evils under which American business 
suffers is the lack of clear understanding as to directors' 
responsibility. 



CHAPTER VII. 

MONEY. 

Its Functions and Forms — Seigniorage — Depreciation — The General Level 
of Prices — Conflicts between Debtor and Creditor — Bimetallism in 
Theory and in History — Irredeemable Paper Money. 

Of the abundant literature on this subject, perhaps the best short work 
for general use is W. S. Jevons : " Money and the Mechanism of Exchange." 
4th ed. London and New York, 1878. This may be supplemented by 
H.White: " Money and Banking." Boston, 1895. 

The general theory of money and credit is admirably developed in the 
third book of John Stuart Mill's " Political Economy." 

J. L. Laughlin, " History of Bimetallism in the United States," New 
York, 1886, deals with the subject of silver coinage from the monometallist 
standpoint. The best presentation of the bimetallist argument is perhaps 
given in J. S. Nicholson : "A Treatise on Money and Essays on Monetary 
Problems. 2d ed. London, 1893. 

The annual reports of the U. S. Treasury Department furnish muck 
statistical matter which is of great value. 

§ 201. Nearly all business contracts and agreements 
— sales, leases, wages, loans, insurance, etc. — call for pay- 
ments of money from at least one party. Money is best 
defined as a thing which, by common consent of the 
business community, is used as a basis of commercial 
obligations. Whatever may be chosen for this purpose, 
becomes, by the very fact of being thus used, a convenient 
standard for measuring private wealth — a value denomi- 
nator, as it is sometimes called — by means of which the 
power and advantage attaching to the ownership of differ- 
ent kinds of saleable property can be compared. 

§ 202. There are two quite distinct purposes for which 

180 



RESERVE AND CIRCULATION. l8l 

supplies of money are needed by the business community 
and its individual members. 

(i) A certain amount of capital must be held in this 
form as a cash reserve to secure solvency. 

(2) A large amount of income may be received in this 
form as a convenient medium of excJiange. 

The latter function seems at first sight much more 
important than the former. The volume of transactions 
settled by payments of money as a medium of exchange 
in the course of a year is far greater than the whole 
amount of cash reserve in existence at any one time. In 
spite of this disparity, the function of money as capital is 
of more fundamental consequence. If we have a proper 
cash reserve of money, we can use other things as media 
of exchange. We can make our payments by bank 
checks or other instruments of credit. If we have not an 
adequate reserve of capital in the form of money, no 
credit or banking system, however well devised, will act 
as a substitute. The individual or the community that 
wishes to do a successful business must keep an adequate 
stock of cash — not necessarily as a means of payment, 
but as a guarantee of solvency. The ease with which 
other means of exchange can be substituted for money, 
does not prove that money is unnecessary ; it proves that 
its function as a means of exchange is not the sole or 
even the principal object for which it is needed. 

§ 203. It sometimes happens that there are two differ- 
ent standards of contract in common use at the same 
time. In that case we really have two independent forms 
of money in the same community. It may be that one 
article is used for the settlement of debts and other long 
time contracts because of the stability in the conditions 
which affect its supply and demand, while another is used 
for sales and wages because of its superior convenience as 
a means of exchange. This state of things has been ex- 
emplified in English history in cases where rents were 



1 82 MONEY. 

calculated in wheat ' or in days' labor, while payments 
were made in coin. The standards which served as units 
for hiring land, were absolutely unavailable as a means of 
exchange in ordinary life. 

A basis of contracts which does not serve as a medium 
of exchange is known as '^noney of account. 

§ 204. The concurrent use of different kinds of money 
for different purposes may result from the attempt of the 
government to force the nation to use money of a kind 
which some of its members dislike or distrust. This state 
of things has seemed imminent in the United States, when 
the agitation for free silver coinage has been most active. 
A large number of the more permanent contracts have 
been made payable specifically in gold. If silver became 
the medium of exchange and unit of reckoning for ordi- 
nary transactions, we should see the concurrent use of 
two different kinds of money side by side. Such a state 
of things is extremely undesirable. It is of great impor- 
tance to the commercial world that the money which a 
man receives for the goods which he sells should be avail- 
able for the settlement of debts ; and conversely that the 
money which the creditor receives from those who are 
indebted to him should be serviceable for the purchase of 
current supplies.'' 

' Adam Smith has discussed the advantages and disadvantages of " corn 
rents." In the long run, wheat is probably a more equitable standard of 
payment than either gold or silver, because the number of people tends to 
adjust itself to the food supply, so that there will be a rough correspondence 
between the value of a bushel of wheat and that of a day's labor. But from 
year to year wheat fluctuates more than gold or silver, because of variations 
in its production, and still more because of the absence of an accumulated 
stock large enough to reduce the effect of these variations to a minimum. 
In ordinary contracts the danger from momentary fluctuations outweighs the 
gain from permanent steadiness, because sudden changes involve worse vio- 
lations of commercial equity than slow ones. 

^ Menger has observed that the essential characteristic of money is its 
saleableness. If the same thing serves at once as a medium of exchange 
and a basis of contracts, it combines present and permanent saleableness in 
the highest degree. 



GOMMODITIES USED AS MONEY. 1 83 

§ 205. Any commodity can serve as money where the 
public accepts it without question as a unit of reckoning 
and a means of settlement of debts. To this end it is 
only necessary that it should be universally desired, so 
that no man need fear having it left on his hands ; and 
that it should be homogeneous, so that people demand a 
certain quantity of it rather than a specified piece of it. 
Articles of the most diverse sort, like the salt of Abyssinia, 
the tobacco cakes of the Virginia colonists, or the shells 
which formed the wampum of the North American In- 
dians, have been used as money by communities in differ- 
ent stages of civilization. Among pastoral peoples cattle 
serve as a unit of reckoning, and not infrequently as a 
medium of exchange. The Latin name for money, 
pecunia, is derived from pecus, a flock ; and it is probable 
that the English word " fee " is connected etymologically 
with the German Vieh, cattle. 

§ 206. Metals have some advantages over all other com- 
modities for use as money. In the first place, they are 
more permanent. They are not liable to destruction by 
fire nor to quick consumption in emergencies. There is 
thus a large permanent stock of metal carried over from 
year to year, which makes the available supply less de- 
pendent upon fluctuations in current production. The 
world's stock of gold coin and bars probably amounts to 
nearly four thousand million dollars — many times the 
annual production or consumption. Under such circum- 
stances, the amount produced in any one year might be 
greatly increased or diminished without causing more than 
a slight effect on the total volume in use. If this state 
of things continued for a series of years, we should have 
a gradual expansion or contraction of the world's gold 
currency ; but the large permanent stock would make the 
percentage of annual increase or diminution so small as 
to allow contracts to adjust themselves to the change in 
conditions. 



1 84 MONEY. 

The metals are also, as a rule, more homogeneous than 
any other commodities in use, and offer great mechanical 
advantages as means of exchange. They can be cut into 
pieces of whatever size is wanted, and these pieces can 
pass from hand to hand ; being accepted either by ac- 
count or by weight, as the importance of the transaction 
demands. 

§ 207. The choice of a metal for use as money has de- 
pended mainly on its cost of production. If the cost 
was too low as compared with the purchases of daily 
life, the pieces of money became so large as to be 
inconvenient to handle. If the cost was too high as com- 
pared with that of articles to be exchanged, the pieces of 
money became so small as to be incapable of the neces- 
sary subdivision without great danger of loss. As the 
knowledge of mining and metallurgy has increased there 
is a tendency to substitute more costly metals for less 
costly ones, on the basis of convenience alone. Iron, which 
was in occasional use in ancient times for coins of low 
value, has been displaced by copper and nickel. Copper, 
which was first used for transactions of considerable mo- 
ment (the Roman as being originally a pound of copper), 
has been gradually relegated to a position of trifling im- 
portance. Silver, which was formerly a medium of ex- 
change for very large transactions, has now on the whole 
given place to gold for these purposes. 

On the other hand, a metal may be too rare to com- 
mand universal acceptability. The experiments of Rus- 
sia in coining platinum did not prove a success. Even 
gold has a relatively low value among less civilized 
nations, which have but slight experience of large trans- 
actions. There was a time when an ounce of gold in 
Europe would purchase thirteen or fourteen ounces of 
silver, but could be bought for three or four ounces of 
silver in the far East. 

§ 208. When the government or some accredited agent 



COINAGE. 185 

of the government places a stamp upon a piece of metal 
certifying its weight and fineness, the process is known as 
coinage. When the genuineness of a coin is undoubted, 
it has a great advantage over uncoined metal as a medium 
of exchange. People will then accept it by tale or count 
instead of by weight. Such acceptance furnishes a temp- 
tation to the counterfeiter, who attempts to place a stamp 
like that of the government on baser metal or on a piece 
of inferior size, and to the clipper or sweater, who at- 
tempts to abstract part of the metal from the coin by 
processes which will not so greatly change its appearance 
as to prevent its acceptance in ordinary transactions. To 
meet the danger of counterfeiting there has been a con- 
stant improvement in the art of coinage. The oldest 
coins have a stamp on but one side. A little later the 
stamp was put on both sides, so that the thickness of the 
metal could not be reduced without defacing the stamp 
itself. To prevent clipping, the edges were milled by 
mechanical devices. To defeat the art of the sweater, 
provision was made for the retirement and recoinage of 
pieces that began to show the effects of natural wear; 
thus rendering artificially worn coin an object of public 
distrust. 

§ 209. Where a system of coinage has become estab- 
lished it is customary for the government to declare its 
coins legal tender for all debts. A seller, laborer or cred- 
itor, if he has agreed to receive a certain amount of 
money in settlement of what is due him, is obliged to 
accept such coins as money. They are a " legal tender," 
which he has no right to refuse unless his contract has 
been made in terms of some commodity other than 
money. Where the coin is really acceptable, and the 
function of government is only that of certification, the 
legal tender feature simply gives effect to the public will, 
and prevents annoyance and uncertainty. Where for any 
reason the money is not thus universally acceptable, and 



1 86 MONE y. 

the government attempts to create by legislation a de- 
mand and a purchasing power which does not otherwise 
exist, the opportunity to declare a coin legal tender is apt 
to be abused. Such abuse is most common and flagrant 
in communities which are about three-fourths civilized. 
Before they have reached this stage, people make con- 
tracts payable by weight, because they have not yet 
learned the uses of coinage; after they have passed this 
stage, they have recourse to the same means, because 
they have learned the abuses of coinage and the methods 
of protecting themselves against them. The authority of 
the government in making money acceptable seems quite 
unlimited as long as it is used to give expression to the 
will of the property-holders ; but when once it attempts 
to act independently of that will, it is found to be very 
shadowy. 

§ 2IO. When the government agrees to put its stamp of 
weight and fineness, and thus bestow the legal tender 
character, on any piece of metal of the required size and 
quality, we are said to have /ree coinage of that metal. 
This does not mean that it is done for nothing, but that it 
is done for every one who desires it, and at a price not 
disproportionate to the actual cost of the operation. The 
work of coinage involves certain expenses to the govern- 
ment for assaying and minting, amounting in the case of 
modern standard coin to about one-fifth of one per cent. 
If a private person brings gold to the mint to have its 
weight and fineness certified, most governments retain an 
amount of metal sufficient to defray this expense. A 
few nations, like England, have made no such deduction, 
believing that it is an advantage to the country to allow 
people to convert their gold into coin with the utmost 
freedom, and that the government for the sake of this 
public advantage can well bear the small loss which is 
involved. The balance of opinion is on the whole against 
this view. Countries like the United States or France 



SEIGNIORAGE. 1 8/ 

which make a small charge for coinage, in order to cover 
the expense of the process, have habitually performed the 
work better than those which have done it for nothing. 
The advantage to the public in the superior execution of 
the coinage has been of more consequence than the slight 
gain in the elasticity of the currency which the English 
business world may have enjoyed. 

§211. In some cases the government retains, for the 
profit of the exchequer, an amount larger than the actual 
cost of coinage. A charge of this kind is known as 
seigniorage^ The word is derived from the fact that 
rights of coinage in mediaeval times were often made a 
most valuable prerogative of the " seignior " or feudal 
lord. 

Almost every civilized nation deducts a considerable 
seigniorage from its smaller coins ; that is, it puts less 
metal into these coins than they can purchase in the open 
market. The object of this practice is to prevent them 
from being melted down for use in the arts or for export. 
A certain amount of small currency is always needed as a 
medium of exchange. If any of it is withdrawn for use in 
the arts the remainder becomes inadequate for monetary 
transactions, which causes great inconvenience, if not 
hardship. Now if the metal in a half dollar is worth less 
than half as much as the amount of metal in a dollar, 
people will choose the large coin to melt down, and the 
small coin will remain in circulation. When the frac- 
tional currency is made of a different material from the 
larger currency, this principle is equally applicable. If a 
hundred cents contained a dollar's worth of nickel and 
other metals combined with it, not only would the cents 
be of inconvenient bulk, but we should be in constant 
danger of having them withdrawn from circulation and 

' The name " seigniorage " is sometimes, though less properly, applied to 
the small charge described in the previous paragraph. This is better desig- 
nated by the French term brassage. 



1 88 MONEY. 

melted if the price of nickel went up while that of gold 
remained stationary. In order to maintain this currency 
in daily use at a value higher than that of the bullion 
which it contains, the government limits the quantity of 
such issues to the actual wants of the people. Two half 
dollars are worth as much as one dollar, because half 
dollars are needed for current purposes of exchange. As 
a rule, governments do not give this fractional currency 
the attribute of legal tender, except in small amounts. 
Limited issues of small currency containing less than its 
market value of metal are known as subsidiary coin. 

Where a seigniorage is abstracted not only from the 
subsidiary coin, but from the legal tender money, the pro- 
cess is known as debasement. 

§ 212. If a relatively small amount of debased currency 
is issued, its chief effect is to drive a nearly corresponding 
amount of better money out of circulation. 

If the people of a country have been in the habit of 
using a thousand million dollars of standard weight, it 
shows that this amount is needed as a reserve for carry- 
ing on the business of the country at the old price level. 
The loss of productive power due to any attempt to trans- 
act business with a smaller cash capital is greater than 
the gain from the use of a little more metal in the arts, or 
from the purchase of foreign products with that metal. 
But if the government adds one hundred million light- 
weight dollars to the money of the country, this equilib- 
rium will be destroyed. The increase in the number of 
dollars in the country will tend to make each dollar worth 
less, and given sums of money will purchase fewer goods. 
Under these circumstances, some dollars will be melted 
down for use in the arts, and some will be exported to 
buy foreign products, until the supply of dollars is reduced 
to approximately its old amount. 

The dollars chosen for melting or for export will be the 
ones which contain the largest weight of metal. For if 



GRE SHAM'S LA W. 1 89 

two Coins are equal in debt-paying power, but unequal in 
utility in other respects, a man will reserve the worse coin 
for paying his debts, and use the better coin for purposes 
where its advantage is felt. This tendency of bad money 
to drive out good money was noted by so ancient an 
observer as Aristophanes. It was brought prominently 
to the notice of the English-speaking world by Sir 
Thomas Gresham, Chancellor of the Exchequer under 
Elizabeth, and is commonly referred to as Greshani s 
Law. 

§ 213. When the amount of debased currency has be- 
come so great as to afford, the necessary reserve for all 
transactions in which the government can compel the 
creditor to accept this form of payment/ the limit of dis- 
placement is reached. For when all the current circula- 
tion of the country is debased, there is none left which can 
be advantageously used in the arts or for export. Any 
further issue will produce a redundant stock of money, 
and a fall in the value of each piece of money, which 

' As the amount of debased money grows larger, its sphere of usefulness 
grows smaller. Importers and others engaged in foreign trade have to pro- 
vide themselves with a certain amount of cash reserve which derives its value 
from something more wide-reaching in its effects than a legal tender act. 
Farsighted capitalists, who fear the future fiscal policy of the government, 
insert stipulations in their loans or in their leases, requiring payment of dues 
in some specific commodity rather than in the general currency of the country. 
Even as a medium of exchange in domestic transactions, the debased money 
may be discredited by the action of the people. D'Avenel has collected 
some curious facts which show that the arbitrary changes in coinage made 
by the French crown were to a large extent rendered inoperative in this way. 
The same result was seen in California, during the Civil War, when the 
public was able to nullify the legal tender act and prevent the use of paper 
currency as money throughout the state. A man might pay one debt in 
paper, but he was thereby cut off from the chance of doing a credit business 
afterward. In the rest of the country paper money was available for general 
business purposes, but a certain amount of gold had to be retained by those 
engaged in the foreign trade, for the adjustment of their purchases abroad 
and for payments of any customs duties to the United States at home. The 
interest payments of the United States Government on the great bulk of its 
loans also involved the use of gold coin, and correspondingly restricted the 



190 MONEY. 

manifests itself in the form of rising prices. If the govern- 
ment persists in putting debased coin into circulation, 
this increase in the amount of currency and diminution in 
its value can go on until the purchasing power of the coin 
falls so low as to allow it to be melted down or exported 
in spite of the seigniorage. 

Such an increase in debased currency beyond the dis- 
placement limit, is known as inflation ; the resulting loss 
in purchasing power is known as depreciation. 

Debasement usually results in depreciation, because the 
fiscal motive to expand the amount of a debased cur- 
rency is very great. If the government abstracts a cer- 
tain amount of bullion and coins the remainder, the bullion 
as bullion is relatively useless. The temptation to coin 
the seigniorage as a means of paying current expenses, or 
of meeting some unexpected emergency, is enormous. 
This motive, seconded as it habitually is by the interest, 
real or supposed, which many voters have in seeing an 
increased abundance of money, has proved well-nigh irre- 

field of circulation of paper. In later years, in connection with the agitation 
for silver coinage, the number of obligations which specifically promised 
payment in gold was gradually increased. It is obvious that if the United 
States should change from a gold to a silver standard, a large part of the 
transactions of the country must still be fulfilled in gold, unless the courts 
should legalize a direct violation of specific promises. 

The parity of gold and silver dollars is to-day jeopardized, not because the 
supply of silver money has become nearly equal to the total demand of the 
United States for currency, but because it has become nearly equal to that 
part of the currency demand over which the legal tender act exercises effec- 
tive control. There is no reason to apprehend that the country will lose all 
its gold. But there is a great deal of apprehension that people will cease to 
treat gold and silver dollars as equivalent. To keep them at equal value the 
government has been compelled not only to stop the coinage of silver dollars, 
but to pay gold on demand for any of its coin obligations. The equivalence 
between the two forms of currency is thus made dependent, not on the large 
stock of gold in the country, but on the small stock of gold in the treasury ; 
not on the solvency of the United States as a nation, but on the sufficiency 
of the current receipts of the United States Government — a far more preca- 
rious matter. 



REDEEMABLE PAPER. I9I 

sistible. The world's monetary history shows that very 
few governments have been able to resist the temptation 
which the existence of a seigniorage involves. 

§ 2 14. Paper money is a convenient substitute for gold 
or silver on account of its lack of weight, and has there- 
fore come into increasing use as transactions have grown 
larger. It has three forms, governed by different laws and 
to be judged on wholly different principles. 

1. Coin or bullion certificates. These certificates simply 
state than an amount of coin or bullion corresponding to 
the face of the note has been deposited with the govern- 
ment and is held as a fund to redeem that note, not to be 
used for anj' other purpose whatsoever. The amount of 
coin or bullion thus specially reserved always corresponds 
exactly to the amount of coin certificates. These, there- 
fore, have exactly the same purchasing power as the coin 
or metal for which they calL They are more convenient 
to handle than metal and do not involve any danger 
except that of absolutely reckless dishonesty and viola- 
tion of pledges on the part of the government; a vio- 
lation which is not likely to occur with deposits thus 
specifically appropriated. The gold and silver certificates 
in the United States, and (to all intents and purposes) 
the notes of the Bank of England (see chapter viii), are 
of this description. 

2. Rfdeemable paper. 'Like the coin certificate, this is 
a promise on the part of the government to pay coin ; but, 
unlike the coin certificate, it is secured only by the general 
solvency of the treasury department, and not by a specific 
deposit, dollar for dollar. Experience proves that this is 
not nearly so safe a reliance as that on which the coin cer- 
tificate is based. The government, in issuing notes which 
are secured by the general assets of tke treasury, is really 
doing a banking business, whose safety depends upon the 
degree in which the administration and the legislature 
understand the methods of banking. At the very best. 



192 MONEY. 

there is danger that the assets on which the government 
relies for the payment of such notes will fail in an emer- 
gency. The treasury department is not well constituted 
for doing a general banking business. The assets of the 
government are, for themost part, permanent investments 
of a kind which it is not easy to sell at short notice. When 
a fiscal emergency arises the dangerous power, possessed 
by the legislature, of declaring such notes a legal tender 
even if they are not redeemed, is a constant menace to 
financial stability. 

3. Irredee^nable paper. This is neither more nor less 
than money on which the government has charged a 
seigniorage of approximately one hundred per cent. It 
is subject in an exaggerated degree to all the dangers 
arising from debased coin. If a coin is debased twenty 
per cent there is a limit to the issue of such coins by the 
government. When that issue has gone so far that prices 
have risen twenty-five per cent,^ the profit to the govern- 
ment on further issue stops, and the danger from this 
source reaches its natural limit. But in the case of irre- 
deemable paper such issues may go on indefinitely, until 
legal tender provisions are nullified by the refusal of the 
people to accept the discredited paper. 

§ 215. Besides these various forms of government pa- 
per, the banks of most countries issue notes which are 
intended to circulate from hand to hand. Except in 
those comparatively rare instances where bank-notes are 
made a legal tender, they do not properly come within 
the definition of money. They are only promises to pay 
money, which are made by responsible corporations. 
But the note of a bank is apt to be quite as good as 
that of the government which charters the bank ; and 
we find both kinds of paper in circulation side by side. 

The sum total of instruments of circulation which pass 

^ If the value of $r falls to $0.80, things which formerly sold for $1 will 
now sell for about $1.25. 



THE GENERAL PRICE LEVEL. 1 93 

from hand to hand — coin, government notes, and bank- 
notes — is known as the currency. 

Of equal importance as means of exchange are certain 
instruments, like bank checks, which do not circulate 
from hand to hand, but which are cancelled when they 
have served to settle one transaction, or at most a short 
series of transactions. The conditions which govern the 
use of these instruments as substitutes for money are 
described in the next chapter. 

§ 216. The value of money is measured by the quantity 
of other things which a unit of money will purchase. It 
varies inversely as the general level of prices. If general 
prices are high, a given amount of products or services 
will cost a great many dollars. This of course means 
that a given number of dollars will buy comparatively 
few products or services. The purchasing power or value 
of money is therefore low when the price level is high,, 
and vice versa. 

If the prices of different commodities rose or fell simul- 
taneously, it would be easy to ascertain the amount of 
change in the general price level and in the value of 
money. But the price of each article is subject to inde- 
pendent variations of its own. Some articles rise while 
others fall. Under these circumstances the problem of 
determining the general price level becomes an extremely 
difficult one. Several different methods have been pro- 
posed for its solution. Under the method first used^ 
which has the advantage of simplicity, we take the re- 
corded prices of a number of articles in a market where 
statistics ^have been accurately kept for a series of years. 
We select some one year for a basis of comparison, and call 
the price of each article in that year 100. We then compare 
the price of each article in the next year with its price in 
the year which we have chosen for our basis of compari- 
son, and take the average of the percentages thus ob- 
tained to constitute what is known as the index number 



194 MONEY. 

for the year in question. For instance, if we choose i860 
as our base, and are considering four articles whose prices 
in 1861 were respectively 98 per cent, loi per cent, 104 
per cent, and 109 per cent of those in i860, the average 
recorded price of these four articles in 1861 would be 103 
percent of the average for i860. If the level of prices in 
i860 were represented by the index number 100, that in 
1 86 1 would be represented by the index number 103. 

The results obtained by this method are somewhat 
arbitrary, because they depend upon the articles selected 
for observation. This difificulty may be partly met by 
dealing with as wide a range of articles as possible.^ But 
even when we apply it with the utmost completeness this 
method is defective, in that it fails to take account of 
differences in importance between different commodities. 
It is unfair to let a rise in the price of pepper offset a cor- 
responding fall in the price of wheat, because the total 
expenditure for the one is so much less than for the other. 
To avoid this difificulty Palgrave has urged the use of a 
weighted average of prices where each article is given an 
importance proportionate to the quantity marketed, as 
recorded in trade statistics. Falkner, working for the 
United States Senate Committee on Wages and Prices, 
has adopted a modification of Palgrave's method, in 
which he assigns commodities their relative importance 
not on the basis of total amounts sold in wholesale mar- 
kets but on the basis of quantities used by the typical 
workingman's family.^ In point of fact, the results 
obtained by an unprejudiced application of the three 
methods are substantially alike. They all indicate that 
gold prices in different countries rose from 1850 to 1873, 

' The tables of the Economist and of Soetbeer are perhaps the best and 
most widely known. 

^ The method of the United States Senate Committee is open to criticism 
from the fact that it applies wholesale prices to quantities which are pur- 
chased at retail. 



INDEX NUMBERS. I95 

and have fallen since that time ; so that the index numbers 
which represent the general price level in 1890 stand 
not far from the level of 1850. Since the crisis of 1893 
there has been a further fall, so that the general price 
level of 1895 is exceptionally low. 

§ 217. If we regard our index numbers not as records 
of wholesale prices but as indications of the enjoyment 
obtained in spending money or the sacrifice involved in 
earning it, all the methods which have been employed 
make the figures for recent years lower than they ought 
to be. 

1. They deal with payments for products and not for 
services. The former have fallen in price, owing to labor- 
saving improvements ; the latter have risen quite as often 
as they have fallen. A budget of family expenses should 
include house rent and services as well as supplies, in 
order to indicate the actual expense of living. 

2. They deal with wholesale prices instead of retail 
ones. The work of the retailer is one of those services 
which have been least affected by modern improvements ; 
and therefore retail prices have fallen relatively less than 
wholesale prices. 

3. As a rule, the index numbers are based on prices in 
the wholesale markets nearest the point of consumption. 
If a producer is obtaining the savie price for an article in 
1895 that he did in 1875, while the cost of railroad and 
steamship transportation has fallen, the recorded price of 
the article falls. This tends to reduce the index number 
correspondingly, and to show an apparent loss to the pro- 
ducer where there is no real loss to any one except the 
transportation companies. 

All these causes combine to make the gain to the con- 
sumer and the loss to the producer from the observed 
fall in prices much less than a superficial view of the index 
numbers would lead us to infer. 

§218. The problem of explaining variations in general 



196 MONEY. 

prices is even more complex than the problem of deter- 
mining the amount of those variations. 

If the total amount of business transactions in the 
United States is $100,000,000,000 in 1895 and $110,000,- 
000,000 in 1896, this change indicates, from the standpoint 
of the sellers, either an increase in the extent of the trans- 
actions themselves or in the general price level on which 
those transactions are conducted. From the standpoint 
of the buyers it indicates an increase either in the number 
of dollars in use or in their rapidity of circulation — in the 
amount of exchange work which a dollar can perform in 
the course of a year. The $110,000,000,000 paid by the 
buyers may be regarded as the product of the amount of 
money in the country multiplied by its average rapidity of 
circulation. If there are 1,000,000,000 dollars in use, a 
volume of business of $1 10,000,000,000 indicates that each 
dollar on an average changes hands 1 10 times in the course 
of the year. The $1 10,000,000,000 received by the sellers 
may in like manner be treated as the product of the 
physical volume of business multiplied by the general 
price level. If the price level of 1896 is to that of 1895 as 
102 : 100, and the volume of business has increased from 
$100,000,000,000 to $110,000,000,000, it indicates that the 
transactions of 1896 at the prices of 1895 would have 
amounted to very nearly 108,000,000,000 ; in other words 
that about eight per cent of the increase in the monetary 
transactions is due to changes in the amount of transfers 
of goods and securities rather than to changes in the scale 
of prices paid. 

Let the amount of money in the country be represented 
by J^and its rapidity of circulation by R. Let the price 
level of 1896 be represented by P (that of 1895 being 
treated as unity). Let the transactions of 1896, estimated 
at the prices of 1895, be represented by T. Then Ry.M 
will represent the total of prices paid by buyers and Px T 
the total of prices received by sellers. The two products 



CIRCULATION AND PRICES. 1 97 

obviously represent opposite aspects of exactly the same 
series of transactions ; so that as a matter of necessity, 

Ry.M= PXT 

If we can treat the rapidity of circulation and the extent 
of business transactions as constant/ the quantity of money 
and the general level of prices will be proportionate to one 
another. 

§ 219. This proposition simply states a fact. It does 
not show the method by which this fact is brought about, 
nor does it indicate which of the things under discussion 
is cause and which is effect. When the amount of money 
is regulated by the discretion of the government, as in the 
case of irredeemable paper, the changes in quantity of 
money are the cause, and the variations in price level are 
the effect. Whatever may be the quantity issued, the 
prices will tend to adjust themselves to it with great 
rapidity. If the government inflates the currency ten per 
cent it is forced to make most of its purchases with that 
money at a ten per cent advance because active business 
men know enough of commercial history to be sure that 
an increase in the numberof dollars means a proportionate 
fall in the purchasing power of each dollar. Among per- 
sons of less commercial intelligence, prices will not adjust 
themselves to the new conditions quite so rapidly, and 
there will be a time when their more astute neighbors 
make a profit by paying them in an inflated currency at 
the old scale of prices. But this state of things is quite 
transient, and the general price level soon adjusts itself 
to the volume of government paper in circulation. 

When the amount of money is regulated by the dis- 
cretion of individuals, under a system of free coinage, the 
case is more complicated. Changes in the quantity of 
money under this system are at ojice a cause and an effect 

' Or as rising and falling together. The study of the conditions which 
affect rapidity of circulation must be reserved for the next chapter. 



198 MONEY. 

of changes in general price level. If we have to choose 
between the two ways of looking at the matter there is in 
the majority of cases less error in treating them as an 
effect than as a cause. The amount of production and 
coinage of gold is so far affected by changes in the general 
price level that it tends to adapt the supply of money to 
the demand and mitigates changes in general prices far 
oftener than it causes them. 

§ 220. Under a free coinage system, the amount of 
money is not fixed by action of the government, but is 
allowed to adjust itself to the wants of trade. If the 
marginal utility (§ 92) of an ounce of gold in the arts is 
less than the marginal utility of the products for which it 
can be exchanged when used as money, there will be a 
tendency to withdraw gold from the arts and convert it 
into money. If the utility of gold in the arts is greater 
than the utility of the things which it will purchase when 
used as money, the process is reversed ; coin is melted 
down, and used in gold manufactures. Equilibrium is 
reached when the marginal utility of an ounce of gold 
employed in the arts is equal to the marginal utility of 
the things which that ounce will buy if it is converted 
into money. 

This is sometimes treated as a solution of the problem 
of the value of money. It is far from being a full one. 
It indicates certain conditions which prevail when the 
adjustment between quantity and price is complete ; but 
it does not adequately describe or explain the processes 
by which this adjustment is brought about. 

§ 221. The average amount of gold coin held in a coun- 
try as a reserve during the year will be the sum of the 
average reserves held by individual citizens or corpora- 
tions. If a nation uses no banking system, each indi- 
vidual must hold a relatively great reserve of coin.^ If it 

' Equal to his average payments per day multiplied by the average time 
that elapses between his receipts and payments — -plus a slight margin for 
contingencies. 



CASH RESERVES AS CAPITAL. I99 

uses bank checks as means of making large payments, 
the individual can avail himself of a bank account instead 
of a cash reserve for such payments, and the amount 
of coin which the nation needs as a reserve to secure 
prompt settlement of these transactions will be greatly 
reduced (§ 269). If the nation uses bank notes as well as 
bank checks, thus making small payments as well as large 
ones on the basis of bank credit, the reserve necessary 
to secure the smaller transactions can be similarly re- 
duced (§ 275). But whether the amount needed be larger 
or smaller, whether it be held directly in the cash drawer 
or indirectly in the bank, a certain amount of capital must 
be kept in the form of money. If an individual tries to 
reduce his cash capital to a figure lower than this, the 
loss from doing business with inadequate money is 
greater than the gain from having more capital to put 
into machinery or other things which are more obviously 
productive than money. If a man invests $10,000 in 
machinery, and keeps a cash reserve of $2000, it is be- 
cause the loss of profit from reducing his cash reserve to 
$1000 more than balances the gain in profit which would 
result from increasing his investment in machinery to 
$11,000. For the sake of the profit to be derived from 
holding a money reserve, he causes gold to be treated as 
productive capital instead of being used in the arts; just 
as he withdraws a certain amount of iron or copper from 
uses which give immediate enjoyment, to those which 
promise future profit.' The fact that the gold appro- 

' The great apparent difference between permanent investments of gold 
in money and permanent investments of iron in machines, or copper in vi^ires, 
is due to ivfo facts, i . The investments of gold as capital can be converted 
back into means of direct enjoyment with little or no loss, while those of 
iron of copper cannot. 2. The laws governing the utility of the total in- 
vestment of gold are much more uniform than those which govern the utility 
of the total investment of iron or copper. But after making allowance for 
both these differences, the process of using gold as money is far more 
closely analogous to that of using other commodities as productive capital 
than most writers have assumed. 



200 MONE V. 

priated as capital consists of individual pieces which cir- 
culate from hand to hand, obscures the relation between 
investments in money and investments in machinery, but 
does not essentially alter it. 

The nation's demand for money, measured as capital — 
and this is our only practicable way of measuring the 
quantities of money — is the sum of the cash reserves 
which the individual members of the nation deem neces- 
sary for their maximum profit. The higher the general 
price level, the greater will be the amount of money 
which it is necessary to hold as a reserve ; for with a high 
price level a given amount of money will settle a smaller 
number of transactions. 

§ 222. If there is a temporary deficiency of the money 
reserve, those who have not provided themselves with 
adequate means of making payments will try to make 
use of the gold of individuals or nations who have pro- 
vided themselves with a slight margin above their im- 
mediate wants. This they will do by offers of more than 
the usual rate of interest on short time loans. If this 
high rate of interest on short time loans lasts so long as 
to neutralize the profit obtained from holding capital in 
other forms, people will try to sell their goods and securi- 
ties in order to get gold. This will diminish the price of 
goods and increase the purchasing power of gold. This 
change will usually cause some gold to be imported from 
other countries, and some to be withdrawn from the arts 
for conversion into coin. Under a free coinage system 
this process will continue until the stock of gold available 
for use in the arts has become so reduced and the stock 
of coin so increased that the marginal utility of an ounce of 
gold used in the arts is as large as the marginal utility of 
the things which an ounce of coined gold will purchase. 

The converse case of excess in money reserve shows 
corresponding effects. If it is temporary, the rate of 
commercial interest on short time loans falls lower than 



SUPPLY AND DEMAND 20I 

that on industrial investments. If it is local, it operates 
to send gold coin away from the place where it is redun- 
dant, for the sake of obtaining higher prices somewhere 
else. If it becomes universal, it causes gold coin to be 
melted down for use in the arts, until the diminishing 
utility of an ounce of gold bullion and the increasing 
utility of the things purchased by an ounce of gold coin 
reach a common level. 

§ 223. The supply and demand of gold money are in 
equilibrium when the amount of gold which the indi- 
vidual members of the commercial world find it profitable 
to hold in the form of productive capital — i. e. money — 
at a given price level, leaves the remaining supply of 
gold, available for the consumers, of such a size that the 
marginal utility of an ounce of gold used in the arts is 
exactly equal to the marginal utility of the goods which 
it will purchase at current prices when used as money. 

§ 224. This conception of marginal utility in its relation 
to money requires further illustration. 

If no gold were used as money, the relative prices of 
gold and wheat would be determined hy the enjoyment 
attending their use and the cost involved in their produc- 
tion. Some of the supplies of gold could be produced at 
a cost of I bushel of wheat per ounce^of gold, some would 
cost I.I, some 1.2, some 1.3, some 1.4, some 1.5 bushels. 
On the other hand, there would be different degrees of 
utility or enjoyment furnished by different parts of the 
gold which might be purchased in the market. Some of 
the gold would give its possessors an enjoyment for which 
they would be willing to sacrifice 1.5 bushels of wheat, or 
more ; for increased quantities they would be willing to 
give but 1.4 bushels, 1.3, 1.2, i.i, or i bushel only. At a 
ratio of one ounce of gold to 1.5 bushels of wheat, the 
supply of gold would probably be greater than the de- 
mand ; at one ounce to i bushel of wheat, it would be less 
than the demand. If the demand and supply are equal at 

' In §§ 224-226 for " ounce " read " sramme." 



202 MONE F. 

a ratio of one ounce to 1.3 bushels, it means that the 
number of people who make a gain in utility by exchang- 
ing wheat for gold at this ratio have a supply of wheat 
corresponding exactly to the demand of those who make 
a gain by selling gold for wheat on these terms. When 
this condition is fulfilled, the market price will be 1.3 
bushels. If this is the normal price (§ 100) as well as the 
market price, i.e., if the rates of supply and demand are 
permanently equal at this ratio, it indicates that the cost 
of producing the last ounces of gold is 1.3 of the cost of 
producing the last bushels of wheat supplied to such a 
market. Yox if the cost of producing an ounce of gold 
were greater than that of 1.3 bushels of wheat, some of the 
producers would gradually cease to mine gold and devote 
their capital to wheat raising ; and conversely, if the cost 
of producing one ounce of gold were less than that of pro- 
ducing 1.3 bushels of wheat which are exchanged for it, 
some of the producers would cease to grow wheat and 
gradually devote their capital to gold mining. 

§ 225. Now suppose that to the uses of gold in the arts 
is added a new use as capital. A part of the gold which 
was formerly used for ornament or manufacture will now 
be used for monetary purposes. The part which is given up 
to these new purposes will be that for which the purchasers 
were formerly willing to give the lowest rate ; in the case 
supposed, 1.3 bushels of wheat. When this part has been 
coined, none of the users of gold will part with his stock 
at less than the rate of 1.4 bushels of wheat to the ounce ; 
nor will he convert it into money unless the scale of prices 
is such that the coin made from an ounce of his gold will 
buy 1.4 bushels of wheat. A new equilibrium is estab- 
lished, not between the demands of those who offer 
gold in exchange for wheat and those who offer wheat 
in exchange for gold, but between those who use gold for 
enjoyment and those who use it as capital. The purchas- 
ing power of an ounce of gold will go up to the point where 



RATE OF PRODUCTION. 



203 



its marginal utility as gold bullion to the consumers is equal 
to the marginal utility of any of the various articles which 
the money coined from such bullion would purchase. 

§ 226. In this example we have supposed the rate of 
production of gold to remain unchanged. In point of 
fact, it would almost certainly increase. As a result of 
the withdrawal of gold from use in the arts, it would ex- 
change at the rate of 1.4 bushels of wheat for an ounce, 
instead of 1.3, and there would be a similar alteration 
in its ratio of exchange for all other commodities. But 
this change of ratio would soon increase the production of 
gold. For there would be some persons who could more 
profitably grow wheat than mine gold if the ratio of ex- 
change were an ounce to 1.3 bushels, but who could more 
profitably mine gold than grow wheat if the ratio were 
one ounce to 1.4 bushels. And a number of other men, 
engaged in the production of other commodities besides 
wheat, would find themselves similarly situated. There 
would thus be a diversion of capital from agriculture and 
manufactures to gold mining, and an increased supply of 
gold which would prevent the change in the relative 
prices of gold and wheat from being so great as it other- 
wise would be. In the case supposed, it might readily 
happen that the production would increase until one ounce 
of gold exchanged for 1.35 bushels of wheat. 



\ 


n^.8 




X/TTt 




\ A 


Y 




>f 




<-. 


s<^ 


\ 






?2-^ 


?5 — ■ 


-mt 

?♦ 



p, Pif fi* p*- 



In Figure 8, let Op„ Op^, Op^, Op^ represent prices of 
gold expressed in wheat, i. e., the number of bushels of 



204 MONE Y. 

wheat for which an ounce of gold will exchange ; and 
let p^q^, p^2, p£^, p^q^ represent the quantity annually 
used in the arts at these ratios. Let q,m^, q^m^, qpt^, 
q^m^ represent the part of the annual product which will 
be needed for use as money at successive prices.' Finally, 
let the cost of mining be such that, at the successive 
prices, the quantities normally produced will be repre- 
sented by piS,, p2S^, P3S3, p^^. Then if the gold is used 
in the arts alone, the normal price will be fixed by the 
intersection of the curves SjS^ and q^q^ ; but if to this 
there be superadded a use as money, we shall have a new 
point of intersection with the supply curve at a higher 
price and larger quantity. The difference in marginal 
cost of production (at the limit to which it is profitable 
to extend mining operations) will be represented by 
pipj] the total quantity produced will increase from 
p^Ss to pjSy Of this increased product there will be 
withdrawn from use as money an amount S£j ; leaving 
the amount used in the zxts p£j. 

§ 227. In point of fact, the scarcity of gold, so severely 
felt in recent years, is adjusting itself by an increase 
in supply. The gold production of the world, which for 
a number of years (1875-1885) did not vary much from 
five million ounces, had risen in the year 1891 to six 
million, and in the year 1893 to more than seven milhon. 
As long as the men who wanted to invest in mines 
thought that the users of money could be compelled to 
take the metal that the producers desired to offer, there 
was a tendency to mine silver rather than gold ; but when 
it became evident that mining was to stand on the same 
footing as other industries, and that the producers must 
consult the consumers' convenience in order to dispose of 

' This may take the form of a negative quantity ; that is, the need for 
gold in the arts may rise so high that some will be taken from the stock of 
money left over from past years. In this case the direction of many of the 
changes described in this paragraph is reversed. 



NORMAL VALUE OF BULLLON. 205 

their product, the pubhc soon began to get what it wanted 
in surprisingly large amounts. If this process continues 
the present very low price level can be only temporary. 

§ 228. In the case of gold bullion or any other form of 
money of which increasing supplies can be obtained only 
at increased cost, we thus have a double equilibrium : 

1. Between the marginal utility of the bullion to the 
man who can just afford to use it in the arts, and the 
marginal utility of the amount of commodities purchased 
by a coin of corresponding weight. 

2. Between the cost of production of such bullion and 
the cost of the production of the articles for which the 
corresponding amount of coined money is exchanged. 

If the utility of the bullion is temporarily greater than 
the utility of the articles for which it is exchanged, coin 
will be melted down and converted into bullion. If it is 
temporarily less than that of the articles for which it is 
exchanged, bullion will be taken to the mint for conver- 
sion into coin. If for a series of years the utility of the 
bullion is greater than that of the articles for which the 
corresponding weight of coin can be exchanged, capital 
will be diverted from the production of those articles 
and used in mining gold. In the converse case, capital 
will be withdrawn from gold mining and devoted to other 
industrial purposes. 

This adjustment, which is simply an application of the 
general laws of normal price (§ 100) to the special case of 
gold, furnishes a guarantee against sudden changes of 
ratio between gold and other commodities. If the gen- 
eral level of prices goes up so that fewer commodities can 
be bought for a given weight of gold, the resulting con- 
version of coin into bullion will diminish the quantity of 
money and will put prices down. If, on the other hand, 
the general level of prices goes down, and more com- 
modities can be bought for a given weight of gold, the 
resulting conversion of bullion into coin will increase 



2o6 MONE V. 

the quantity of money and tend to put prices up. If 
either of these processes continues for any considerable 
length of time, until the reserve stocks of coin have been 
melted into bullion or until the reserve stocks of bulhon 
have been converted into coin, the effect of cost of pro- 
duction will begin to come into play. If prices continue 
high, so that a given amount of gold exchanges for a 
small quantity of other useful things, people will abandon 
gold mining and produce more of those other things. If, 
on the other hand, prices remain low, so that a small 
quantity of gold purchases a large number of useful 
things, people will increase their production of gold and 
divert capital from the production of other things for that 
purpose. These movements will make the change in the 
relative value of gold and of the articles which gold pur- 
chases a slow one, and will give time for contracts to be 
adjusted to any slow changes which may take place. 

That which holds true of gold in this respect holds 
true of silver or copper or any other relatively indestruc- 
tible commodity which is subject to the law of diminish- 
ing return and has been continuously used as money under 
a free coinage system. 

§ 229. In spite of these adjustments, there is always 
considerable fluctuation in the purchasing power of coin. 
Enlarged volume of business, or new uses for the metal 
in the arts, may increase the demand for the metal and 
make its value go up ; improved methods of doing busi- 
ness on credit (chapter viii) or new developments in mining 
will tend to increase the available supply of the metal and 
make its value go down. In the former case we shall 
see a fall in the general price level ; in the latter case, 
a rise. 

Such fluctuations in value alter the relative positions 
of debtors and creditors. If prices rise, a man who has a 
debt to pay can accomplish his object with less labor ; 
while the man who receives the payment cannot purchase 



THE TABULAR STANDARD. 20/ 

SO many things with the money which he has received. 
If prices fall, both of these results are reversed. In the 
former case, injustice may be done to the creditor ; in 
the latter case, to the debtor. 

§ 230. Some writers propose to obviate this injustice 
by a plan known as the tabular standard. They would 
have contracts payable in coin, as they now are ; but the 
amount of such coin for which the creditor might call 
would under this plan depend upon the price level at the 
time when the payments became due. When the index 
number rose (z. e. when the purchasing power of money 
fell) the amount paid should be larger ; in the reverse 
case, it should be smaller. It is argued that in this case 
all the demands of equity would be fulfilled ; and that 
we could use our present money as a medium of ex- 
change without subjecting ourselves to its disadvantages 
as a basis of contracts. 

The execution of this plan would involve considerable 
machinery. In the first place we should have to obtain 
common consent as to the table of commodities which 
would form the basis of the standard ; and in the next 
place we should have to find an authority that could be 
trusted to apply it with intelligence and fairness in order 
to say just what had been the change in purchasing 
power on the basis of this table. This is extremely dif^- 
cult to do. The only group of ofificials which has the 
technical knowledge necessary for dealing with the prob- 
lem is connected with the treasury department. But 
the treasury department is itself habitually a very large 
debtor, and its awards would, justly or unjustly, be made 
the objects of suspicion and criticism. In emergencies it 
would be difificult to trust to their impartiality. Under 
these circumstances, the uncertainty attaching to the 
tabular standard makes its practical usefulness seem 
doubtful. 

§ 2X1. If the tabular standard is considered to be im- 



208 MONEY. 

practicable, there is often an apparent conflict of interest 
between debtors and creditors in the choice of a metal to 
be used for coinage. The creditors believe it to be for 
their advantage to insist on payment in the dearer metal.. 
The debtors believe that it is for their interest to compel 
the creditor to accept payment in the cheaper metal at a 
ratio fixed by the authority of law ; and they claim that 
the interest of the community in these matters coincides, 
with that of the debtor classes. 

§ 232. A policy which by allowing free coinage of more- 
than one metal gives the debtor the chance of using the 
cheaper metal, and which at the same time undertakes to 
protect the creditor by keeping both metals in concur- 
rent or at any rate in alternating use, is known as 
bimetallism. 

Some of the agitation in favor of bimetallism is the re- 
sult of the efforts of silver mine owners who seek a 
market for their product on more favorable terms than 
they can command at present ; and some is connected 
with an unintelligent demand for increase in quantity of 
money irrespective of its quality. But there are several 
serious arguments for the attempt to maintain the two 
metals in concurrent circulation which must be carefully 
examined in detail.^ 

§ 233. It is urged in favor of such a policy, that it dimin- 
ishes the chance of fluctuations in the value of money- 
Its advocates say that if the commercial world uses but 
one metal as money, anything which greatly affects the 

^ The reader who wishes to pursue the subject of bimetallism more fully 
than it is treated in the general references given at the beginning of the 
chapter will find a mine of information in the report of the "Gold and 
Silver Commission " of 1888 (Royal Commission appointed to inquire into 
Changes in the Relative Value of the Precious Metals 1887-88) with accom- 
panying documents. 

The popular discussions of the silver question from each side contain so 
many overstatements and even mistakes of fact that they are generally of 
little use. 



ARGUMENTS FOR BIMETALLISM. 209 

production of that metal will cause a large proportionate 
increase in the volume of coin and a corresponding rise in 
prices ; and that conversely, if its use in the arts is 
increased without a change in the conditions of produc- 
tion, there will be a very decided scarcity and a corre- 
sponding fall in prices. If, on the other hand, two 
metals are simultaneously used as money, a change in the 
production or use of one metal alone will make less pro- 
portionate difference. At the time of the California gold 
discoveries there was a large stock of coin added to the 
currency of the world, and an appreciable rise in prices. 
How much greater would this increase have been had the 
new supplies of money been added, not to an existing stock 
of gold and silver coin, but to the relatively small stock of 
gold alone ? The comparatively slight effect of the gold 
discoveries in California and Australia is cited by the 
advocates of bimetallism as an instance of the salutary 
action of their principle. Only in the rather improbable 
contingency of a simultaneous change in the conditions of 
production and use of the two metals should we have a. 
disturbance comparable in magnitude with that to which 
a monometallic world is daily subject.' 

§ 234. The bimetallists further emphasize their position, 
by pointing out the evils which have arisen since the aban- 
donment of the policy of bimetallism by several of the 
leading nations of the world, in the years immediately suc- 
ceeding 1870. They say that the attempt to use only a 

1 A few years ago when the world was pretty equally divided into gold and 
silver using countries, a nation which maintained both metals in concurrent 
circulation gave its business men the advantage of whatever stability in 
value is due to bimetallism, in a very tangible form. Being able to export 
and import currency freely to or from all parts of the world with which it 
had dealings, such a country not only protected itself against fluctuations in 
price, but protected those of its members who were engaged in foreign 
trade from the more obvious danger of fluctuations in exchange (chapter viii). 
But so few countries now have free coinage of silver that this argument for 
bimetallism has lost much of its force. 



2IO MONEY. 

single metal has caused an actual contraction of the cur- 
rency ; that the use of gold in the arts is so great that 
the additions to the world's stock of coin are inadequate 
to maintain the old price level and properly meet the 
wants of existing business. They attribute the series of 
severe industrial depressions during the last twenty-five 
years to a decline in prices directly consequent upon the 
abandonment of bimetalhsm. They show that many of 
the staple commodities have fallen in price concurrently 
with the fall in silver. They claim that the gold currency, 
which is now the only available basis of contracts, has 
appreciated ; that each unit of money will purchase more 
commodities ; and conversely, that an increased amount 
of commodities is required in order to fulfil an agreement 
which has been made in terms of money. A contract 
which calls for the payment of a hundred dollars or a 
hundred pounds sterling in return for past services, puts 
the man who pays the money in a worse position, and 
the man who receives it in a better position, than was 
contemplated at the time those services were rendered. 
Every man who borrowed money with the expectation 
of producing commodities as a means of paying his debts 
finds himself in worse financial circumstances than he had 
any reason to expect. The result has been a loss to the 
debtor and a gain to the creditor, a loss to the active busi- 
ness man and a gain to the one who sits quietly at home 
and receives interest. The bimetallists urge that this loss 
is at once unjust and destructive ; unjust as between man 
and man, destructive to the active prosecution of business 
enterprise throughout the community. 

§ 235. They also urge — and this is in some respects 
their strongest argument — that a slowly depreciating cur- 
rency is better than a slowly appreciating one. We have 
seen how, in the present tendency toward under-consump- 
tion, the contraction of expenditure for the sak^ of 
profits which are expected but not always realized forms 



FALL IN- PRICES NOT UNIVERSAL. 211 

a source of danger to the community ; and how, for the 
moment at any rate, an inflation of the currency may con- 
tribute to the better utiHzation of national capital by 
increasing national consumption. The bimetallist claims 
that a slowly depreciating currency maintains this health- 
ful process without the reaction which follows reckless in- 
flation ; and that an appreciating currency, such as gold 
appears to be, intensifies all the evils incident to the 
modern passion for over-investment.' 

§ 236, To these charges the monometalHst replies, in 
the first place, by denying most of the allegations of the 
bimetallist concerning the amount of appreciation of gold. 
He can show that the fall in prices chiefly affects those 
articles where new processes have economized the labor 
of production and distribution. He can point out many 
commodities which have fallen but little and a number 
that have actually risen. The articles which have most 
conspicuously fallen in price belong to two classes: (i) 

' Besides these arguments there are two sentiments working in favor of 
bimetallism, which it will not do to leave unnoticed. One is the feeling 
that the debtor is more deserving of sympathy and assistance than the cred- 
itor. The creditor is pictured as a rich financier living on the income which 
he draws from the struggling debtor. In point of fact, the financiers are 
apt to be debtors quite as much as creditors. They hold relatively large 
quantities of stock, as compared with bonds ; their advocacy of the gold 
standard arises from the fact that it enables them to borrow money at lower 
rates of interest and in larger quantities. The chief creditor classes of the 
community are the people who live upon past savings — not usually in very 
large amounts, — the holders of life insurance, and above all the receivers of 
salaries and wages. To deem the debtors worthy of encouragement at the 
expense of these classes is to put a premium on economic recklessness. 

The other sentiment is connected with the feeling that silver mining is an 
industry which has not been very profitable and that it ought to be helped. 
The claim is gravely made that 371 grains of silver really costs as much as 23.2 
grains of gold and that therefore we ought to pay as much for it. But if 
consumers do not want an article, the high cost is a reason against stimu- 
lating its production, and the theory that a man may use the power of the 
government to compel people to buy a thing they do not want at the price 
which it has cost him, is socialism of the extremest type. 



2 1 2 MONE Y. 

Products like steel or sugar, in v/hose preparation there 
have been marked improvements during the period in 
question, enabling a given number of producers to in- 
crease their output and compelling as well as justifying a 
fall in price. (2) Products like wheat, whose improved 
transportation facilities have greatly widened the area 
from which trade centres could draw their supplies, and 
have increased the intensity of competition between 
different producers. Where one or the other of these 
causes has not been conspicuously present, prices have 
been quite as apt to rise as to fall. We see this exempli- 
fied in goods which are mostly consumed at home, like 
eggs ; in goods in which there is little international com- 
petition, like corn ; and even in goods which form the 
subject of international trade, like india-rubber, in case 
there have been no new sources of supply or methods of 
economizing labor. 

§ 237. He can also show that the recent years of falling 
pric-es were preceded by a corresponding period of rising 
prices, and can claim that the injustice to debtor classes for 
twenty years succeeding 1873 was but an offset to a cor- 
responding injustice to creditors before that time. In 
point of fact, the amount of such injustice either way is 
very much less than would appear from looking at the 
figures of the prices alone. For in times of advancing 
prices a part of the loss to the creditor was offset by 
an increase in the interest rate. As prices rose, interest' 
rose. Most of the contracts for the payment of interest 
were terminable at short enough periods for the creditor 
to indemnify himself by increased interest charges for any 
probable depreciation of his principal. Conversely, when 
prices began to fall, interest fell also. The burden upon 
the debtor due to the realization of lower prices for his 
product was in very considerable measure offset by the 
possibility of borrowing capital at lower interest rates. 

§ 238. The monometallist further claims that even if the 



EQUITY OF BIMETALLISM QUESTIONED. 213 

prices of many important staples have moved concurrently 
with that of silver, the price of labor has maintained 
a more nearly constant ratio to that of gold. He urges 
that the demands of justice are better satisfied if the dis- 
charge of a debt requires a fixed amount of labor than if it 
requires a fixed amount of commodities. The question 
of equity in his mind resolves itself into this : Must a 
man do more work to pay a debt than he would have had 
to do at the time when that debt was contracted? If 
this is the case, there is a hardship to the debtor ; if this 
is not the case, he suffers no hardship. The debtor was 
not borrowing a certain amount of comfort from the 
creditor. He was borrowing a certain amount of control 
of labor. Of that labor and its products he has had the 
use during the period stipulated. Even if he is compelled 
to sell the commodities which are the results of that labor 
at lower rates than he expected, because of the increased 
efificiency in production which the rest of the producing 
world enjoys in common with him, this was' a risk which 
he might have foreseen and expected when he contracted 
the debt. The over-production of goods at unremunera- 
tive prices was the very thing which he as a business man 
should have taken care to avoid. That he failed to fore- 
see it and to avoid it indicates, not a defect in the mone- 
tary system, but an over-sanguine temperament on the 
part of the individual speculator or group of speculators. 
§ 239. The monometallist rejects the theory that two 
metals will necessarily be more stable than one. All 
depends upon the metal in question. There is at most a 
slight a priori probability in favor of the concurrent use 
of two metals if it can be proved practicable. But the 
gold monometallist urges that any argument based upon 
this a priori probability is completely overthrown by the 
facts concerning silver mining in recent years. Even 
admitting what may be plausibly claimed as to the 
appreciation of gold, the monometallist urges that this is 



5 14 MONEY. 

far less conspicuous than the depreciation of silver. The 
marginal cost of gold has gone up a little : that of silver 
has gone down a great deal. The attempt to maintain 
bimetallism would have resulted in a rapidly depreciating 
standard with all the evils of over-speculation incident 
thereto ; and this would have been a far worse state than 
that in which the commercial world at present finds itself. 

§ 240. He denies that the evil secondary results which 
follow quick inflation are avoided by a slow and continu- 
ous process of depreciation. They do not come so soon ; 
but in his opinion they come just as surely. For while 
prices are gradually advancing, the more reckless specula- 
tors come into control of business by offering high rates 
of interest which they cannot pay unless the deprecia- 
tion of the currency is still further continued. There is 
then sure to be a gradual over-production of machinery 
under circumstances which make its permanent useful- 
ness out of the question. Such a condition was reached, 
the whole world over, in 1873, when the depreciation of 
gold reached its extreme. The monometalllst claims 
that the severity of the depression that followed was 
not. so much a direct result of contraction, as an in- 
evitable secondary effect of the expansion which had 
preceded ; one which the demonetization of silver may 
at most have intensified, but for which it cannot be held 
responsible as the cause. 

§ 241. But the monometalllst has a stronger argument 
than any of these. He claims that the maintenance of 
bimetallism is impracticable under any of the plans pro- 
posed by its advocates, and extremely doubtful under any 
plan whatsoever ; so much so that the uncertainty attach- 
ing to the future of a bimetallic currency would make it 
an extremely bad one to adopt. 

We may make three distinct suppositions as to the con- 
ditions under w^hich bimetallism is attempted : 

I. When the ratio chosen for the coinage of two metals 



COINAGE AND MARKET RATIOS. 21 5 

is exactly the market ratio of the price of the two metals 
at the time. If an ounce of gold sells at the same rate as 
a pound of silver, the nation which coins each of these 
two metals, putting sixteen times as many grains of silver 
into the silver dollar as it puts grains of gold into the gold 
dollar, will probably have a considerable amount of both 
metals brought to its mint. But it is improbable that this 
exact ratio of bullion value, independent of the operation 
of coinage laws, will be maintained for a long time ; since 
anything which affects the conditions of production or 
consumption of either metal is liable in some degree to 
disturb it. 

2. If the ratio adopted is near the market ratio of the 
bullion price of the two metals, though not absolutely 
coincident with it, their concurrent circulation may still 
be maintained. If, apart from any attempt at bimetallism 
an ounce of gold would exchange for i6^ ounces of silver 
instead of i6, it might readily happen that the opening 
of the mints of a large nation or group of nations to the 
free coinage of silver at a ratio of i to l6 would so 
change the conditions of demand and supply of the two 
metals as to make their bullion value conform to the 
coinage ratio. For if twenty million dollars of silver 
were coined yearly under the operations of such an act, 
twenty million dollars' worth of gold which would other- 
wise have been needed for coinage would be set free for 
use in the arts. To call forth a demand for this addi- 
tional twenty million dollars of gold buillion, some people 
must be induced to use it under the new conditions who 
would not have done so under the old ; a result which can 
only be accomplished by a slight fall in the ratio at which 
it is exchanged for other commodities. On the other 
hand, the increased monetary demand for silver would at 
first cause withdrawals of silver from use in the arts. This 
would mean that those who now wanted the silver would 
have to pay a little higher price to get it. This price 



2l6 MONEY. 

would stimulate an increased production, but additions to 
the product being subject to the law of the diminishing 
return could only be obtained at an expenditure of a 
little more labor per unit of product. If the labor, and 
other elements of expense, needed for the units of added 
product were appreciably greater than that by which the 
old demand for silver had been supplied, this disadvan- 
tage would soon put a stop to increased production from 
the mines, and the price of silver would be permanently 
raised by the additional demand for coinage purposes. 
Meantime, the increased supplies of gold set free for use 
would have made gold mining less profitable, would have 
thrown some gold mines out of use, and would have left 
in operation only those where the cost per unit of pro- 
duct was less. Under those circumstances we should 
have a new ratio between silver and gold, where more 
silver was demanded and produced at slightly higher 
marginal cost, where less gold was demanded and pro- 
duced at slightly lower marginal cost, and where the final 
ratio of such cost would be i6 to i instead of \6\ to i. 

The effective operation of this process depends upon 
the power of the nations which adopt bimetallism to take 
a sufificient quantity of silver, year after year, to raise 
the marginal cost of production without driving gold 
wholly out of use as money. If the annual demand of 
such nations for currency is small, or if the amount of 
additional silver which can be produced at a slight ad- 
vance in price is large, the experiment fails. The greater 
the quantity of silver which the nations that strive to 
maintain bimetalli,sm can absorb annually, the better are 
the prospects of success. The greater the amount which 
miners stand ready to produce at a moderate advance in 
price, the larger are the chances of failure. 

The power of legislation to influence the demand for 
the precious metals is on the whole surprisingly small. 
People will demand a metal for coinage whose bulk makes 



OBSTACLES TO BIMETALLISM. 21/ 

it convenient to handle. If their transactions are small 
they may use copper as a standard. As they buy and sell 
more they will use silver. When their business is very 
large, they will prefer gold. Consequently the relative 
value of the cheaper metals tends to fall as the amount 
of coin in use becomes larger.^ In eastern countries the 
ratio of value of gold to silver has been as low as four to 
one. In Europe in the middle ages it was in the neigh- 
borhood of twelve to one. For the greater part of the 
nineteenth century it was fifteen and a half to one. With 
the development of new mines and new processes since 
1870 it has risen as high as thirty-two to one. This 
change of ratio has been accentuated by the action of a 
number of governments in abandoning the attempt to 
keep gold and silver in concurrent circulation. But there 
is no proof — in fact, there is a decided absence of prob- 
ability — that the various governments could have suc- 
ceeded in maintaining the old ratio if they had tried to 
do so.^ 

3. Where the ratio chosen for coinage is far from the 
market ratio of the bullion the failure of any attempt to 
maintain bimetallism is certain. The difference between 
this case and the preceding one may be made clear by a 

^ If two metals are in concurrent use, an increase in the supply of the 
dearer metal, by increasing the amount of coin, lessens the monetary utility 
of the cheaper metal, ancj makes but a slight change in the ratio of value — 
witness the trifling effect of the periods of large gold discovery. On the 
other hand, an increase in the supply of the cheaper metal increases the 
monetary utility of the dearer metal and makes a great change in the ratio — 
witness the great effect of the silver discoveries in the seventeenth century, 
when there was no legislative discrimination against that metal. An 
increased supply of gold means diminished demand for silver, and a 
parallel movement of value of the two metals. An increased supply of 
silver means increased demand for gold, and a divergent movement of value 
of the two metals. 

^ The quantity of silver coined in some of the recent years has been 
greater than at any previous time in the world's history, but has not sufficed 
to create a demand for the product of the mines at anything like the old 
prices. 



2l8 MONEY. 

concrete illustration. If it takes \^\ days' labor to pro- 
duce a pound of silver and i6|- days' labor to produce 
an ounce of gold, a country which has several hundred 
millions of gold and proceeds to make purchases of silver 
at i6 to I can so increase the quantity of silver demanded 
and diminish the quantity of gold demanded, that the 
marginal cost of the pound of silver and the ounce of 
gold will soon become equal ; but if it takes 12 days' labor 
to produce a pound of silver and 20 days' labor to pro- 
duce an ounce of gold, no amount of regulation is likely 
to make the 12 days' labor command a price equal to that 
of the 20 days' labor. The most that can be expected is 
that a supplementary demand for the products of the 12 
days' labor should increase their selling price to a point 
represented by 13 or possibly 14 days' labor, and that a 
reduction of demand for the products of the 20 days' 
labor should lower their selling price to a point repre- 
sented by 19 or 18 days' labor. But we should still be 
far from reaching an equality of value or concurrent use 
of the two metals as coin at the ratio of 16 to i. Even if 
the whole world should adopt a ratio of 16 to i under 
those conditions of production, the chance of a successful 
issue of such a policy would be extremely problematical. 
It is more than likely that the whole gold product of the 
world could be used in the arts, leaving silver alone to per- 
form the functions of money, without so far lowering the 
demand for gold and increasing that for silver as to make 
their price ratio as low as 16 to i. 

§ 242, When the coinage ratio for one or more coun- 
tries is fixed so far from the commercial ratio as to pre- 
vent the use of more than one metal, we have nominal 
and not real bimetallism. Gresham's Law comes into 
operation. The less valuable metal is brought to the 
mint to be coined and used in paying debts ; the more 
valuable one is exported or used in the arts for the sake 
of its bullion value. 



BIMETALLISM IN FRANCE. 2ig 

§ 243. The most important case where free coinage of 
two metals was successfully maintained was in France 
in the first half of the present century. The conditions 
were favorable for such an experiment. Production of 
both gold and silver was slow and equable. There was no 
likelihood of sudden changes, either in demand or in sup- 
ply. The French financiers saw that the normal commer- 
cial ratio of the two metals under the conditions of use 
then existing was such that I5|- ounces of silver exchanged 
for one ounce of gold. In 1803 this was adopted as the 
ratio at which the French mint would coin either metal.^ 
For nearly fifty years this policy was successfully main- 
tained. If for a time the price of silver rose, gold 
was taken to the French mint ; if the price of gold rose, 
silver was taken to the French mint. The causes for 
such fluctuations were so slight that a moderate amount 
of coinage of one or the other metal was suf^cient to 
exercise a very decided compensating action. But in 
1850, when the California gold discoveries came into 
effect, there was a distinct fall in the price of gold, due to 
its increased production. Silver ceased to be coined by the 
French mint, not on account of any change in the law, 
but from a change in the commercial conditions. In 
order to preserve its stock of fractional silver unim- 
paired, (§ 211), the French Government had to reduce the 
amount of metal in its smaller coins, which it did by in- 
creasing the proportion of alloy, the weight of the coins 
remaining the same. At about this time (1865) Belgium, 
Switzerland, and Italy, whose coinage systems resembled 
that of France, joined with her in forming the Latin Union, 
which has been cited as a most conspicuous example of 
successful bimetallism. As a matter of fact, the success of 
the bimetallic experiment was ended before the Latin 
Union was formed. The bimetallism of the Latin Union 

^ This was only the re-adoption of a ratio which had been established 
in 1785. 



220 MONEY. 

was nominal, and not actual. The great bulk of the free 
coinage under the Latin Union has consisted of gold ; 
the silver coined under its auspices has almost all been 
subsidiary. 

Had the cheapness of gold continued, it is highly prob- 
able that the nominal bimetallism of the Latin Union 
might have been indefinitely maintained ; but as the 
Californian and Australian gold fields became somewhat 
exhausted and new sources of supply of silver came into 
play, the relative price of gold rose, and that of silver fell 
correspondingly. People began to take silver to the 
mints instead of gold. This change was not regarded 
with the equanimity with which the authorities had 
seen the substitution of gold for silver. It was in fact a 
change from a metal which was convenient for use in large 
transactions to one which was extremely inconvenient. 
Just as France in 1864 had taken measures to preserve 
her silver for use in small transactions, she now took 
pains to preserve her gold for use in large transactions, 
not of course by diminishing the number of grammes of 
gold in a twenty-franc piece, but by limiting the amount 
of silver which she was prepared to coin. The example 
of France was followed with more or less hesitation by 
other states in the Latin Union, and in 1876 the prin- 
ciple of bimetallism was abandoned in name as it had 
been twenty years earlier in fact. 

§ 244. The other great series of experiments in bimetal- 
lism was made in the United States. By the coinage act 
of 1792 the United States offered to coin both silver and 
gold. Our financiers were, however, less successful in 
their judgment of the probable commercial value of the 
two metals than the French authorities, and fixed the ratio 
at 15 to I, making the dollars contain either 371.25 grains 
of pure silver or 24.75 grains of pure gold. But 24|- grains 
of gold bullion was worth more in the world's markets 
than 371 grains of silver bullion. Where the two things 



BIMETALLISM IN AMERICA. 221 

had the same debt-paying power, it was advantageous to 
use the 371 grains of silver for paying debts and to sell 
the gold for export or for use in the arts. We had practi- 
cally nothing but silver in use as coin. This state of 
things continued until 1834, when the desirability of 
using gold for large transactions was felt, and the coin- 
age law was so amended as to make the ratio 16 to i in- 
stead of 15 to I, by changing the weight of gold in a dollar 
from 24f grains to 23^2q-. This overdid the matter. While 
24f grains of gold had been worth more than 371 grains of 
silver, 23^^ grains of gold was worth less than 371 grains 
of silver. It was far preferable to take gold to be coined 
and sell the silver either for use in the arts or for export. 
This took place to such a degree that in order to preserve 
its subsidiary currency the United States w^as compelled 
to do what France did some years later. It reduced the 
amount of silver in its fractional coins in order to pre- 
vent export, and maintained their value by limiting their 
issue. From 1853 to 1873 we had nominal bimetallism, 
but in fact the silver was so over-valued that few silver 
dollars were coined, and practically none went into actual 
circulation in the United States. 

§ 245. In 1873 the free coinage of silver was abolished. 
This action seemed to have little importance at the time, 
particularly as the United States was using neither silver 
nor gold dollars, but paper ones ; these being worth much 
less than coined dollars of either kind. But in the years 
immediately following, the increased production of silver 
made the price of silver bullion fall until 371 grains 
of silver Avere cheaper than a paper dollar. Under such 
circumstances there was a loud demand for the reenact- 
ment of the law permitting people to take their silver to 
the mint and have it coined. This demand was urged 
both by the silver producers, who wished a market for 
their product, and by the debtors, who wished an inflation 
of the currency. They were not strong enough to put 



222 MONE V. 

their wishes into effect, but succeeded (1878) in securing the 
passage of a measure known as the Bland Act, by which 
the United States purchased and coined two million dol- 
lars' worth of silver per month, the seigniorage on the 
transaction accruing to the advantage of the government. 
There was a discretionary power given to the Secretary 
of the Treasury to purchase twice this amount, but it was 
never exercised. 

The Bland Act disappointed the expectations both of 
its advocates and of its opponents. It did not create a 
sufficient demand for silver to keep the price from fall- 
ing, as its advocates had hoped. On the other hand, 
it did not prevent the use of gold currency, as its 
opponents had feared. The United States was in a 
strong financial position, both as a people and as a gov- 
ernment. It demanded, for use in its expanding trade, 
an increase in currency of more than two million or even 
three million dollars a month, so that it was able to absorb 
into its circulation the whole amount of silver coined 
under the Bland Act, without in the least crowding gold 
out of use. The government also had so large a surplus 
that it was able to make the necessary purchases without 
impairment of its gold reserves. 

§ 246. Twelve years later the silver men were strong 
enough to secure the passage of a more sweeping act than 
the Bland law. This was known as the Sherman Act of 
1890. It provided for the purchase of four and one- 
half million ounces of silver a month, by an issue of 
treasury notes equal in amount to the bullion value of 
the silver thus purchased. It was hoped by the friends 
of the measure that the increased amount of silver pur- 
chased would send the price of the product up, and that 
notes based on the bullion value of the silver at the time 
of the purchase would be secured by a reserve sufficient 
to protect the government against loss and the currency 
against depreciation. Had silver not fallen in price these 



PURCHASES OF SILVER. 223 

expectations would perhaps have been fulfilled. But the 
actual working of the measure was far from being satis- 
factory to any one. A temporary rise in the price of sil- 
ver brought new mines into use and caused a speculative 
over-production of silver, which made the price fall lower 
than it had ever done before. When the Sherman Act 
was passed the selling price of an ounce of silver was ^^^ 
of that of an ounce of gold. Three years later it had 
fallen to ^-^. Meantime, the additional purchases were a 
burden both to the country and to the government. The 
country had been able to absorb two million dollars' worth 
of silver coin monthly without crowding out gold. It was 
not able to absorb a much larger amount, especially under 
the adverse financial conditions that followed. Nor were 
the revenues of the government adequate to make the pur- 
chases out of surplus income. Extravagant appropriations 
had so completely destroyed the disposable funds that the 
payments under the Sherman Act were accompanied by a 
reduction of the gold reserves in the treasury. In 1893 the 
supply of silver currency in the country had nearly reached 
the limit of the demand for such currency ; partly because 
of the increase in the supply itself, partly because the peo- 
ple began to distrust it to such a degree that they were 
making gold contracts and using gold reserves for many of 
the needs of commercial life. Nor was the government 
in a position to maintain, by force of the treasury reserve, 
an equilibrium which had become so precarious. Relief 
was barely obtained by the repeal of the Sherman Act 
and a return to gold monometallism. 

The experience under the Sherman Act is extremely 
valuable as showing how little is the chance of increasing 
the market price of silver by its forced use as currency. 
During recent years the world's coinage of silver has been 
large, but the increased production has been so great 
as to outrun the monetary demand. The Sherman Act 
proved beyond a doubt that the United States would be 



224 MONEY. 

wholly unable to maintain bimetallism at i6 to i, or any 
ratio approximating to this figure.' 

§ 247. Those who see the impracticability of bimetallism 
at a fixed ratio, on account of uncertainty in the volume 
of silver production, but who at the same time deplore 
the contraction of the currency Avhich they believe to be 
incident to the adoption of gold monometallism, have 
several plans to propose : 

1. Free coinage at shifting ratios, to be determined 
from time to time as the conditions of the market may 
change. 

The practical difificulties connected with the execution 
of this plan are very great. It would make a complicated 
currency system instead of a simple one, and would offer 
government authorities a constant temptation to meddle 
with the currency to their own advantage and to the dis- 
advantage of others. If an attempt were made to regu- 
late these matters by international agreement, the friction 
attendant upon the operation of such agreements would 
inevitably be very great. 

2. Large coinage of silver by a number of nations tO' 
supplement any deficiency in the gold supply, the issue 
of such silver being limited by statute to an amount 
which would not drive gold wholly out of circulation. 

This was practically the position of the United States 
from 1878 to 1893. Every nation does this to some 
extent by the use of subsidiary silver. The attempt 
to carry out the policy on a larger scale, as a means of 
keeping the volume of the world's currency large, subjects 
the nations that undertake it to dangers like those suffered 
by the United States under the Sherman Act. A com- 
mercial crisis may make an amount of silver coin which 
it is easy for a nation to carry during one year exceed- 

' Besides the references at the beginning of the chapter, see F. W. Taus- 
sig's excellent little book on " The Silver Situation in the United States," 
New York, 1893. 



S YMME TA LLISM. 225 

ingly difficult to carry during the next. This liability is 
intensified by the creation of a number of contracts In 
which the commercial world nullifies the action of the 
government and uses the metal it wants, independently 
of legal tender clauses. 

3. Symmetallism, under which the unit of currency 
would consist not of a certain weight of either metal, but 
of a certain weight of both metals combined. Instead of 
saying that a dollar should consist of 23.2 grains of gold 
or 371.25 grains of silver, we might say that it should 
consist of 1 1.6 grains of gold a7id 185.625 grains of silver. 
Of course the ratio of weight and valuation of the two 
metals might be wholly different from what it is in this 
illustration without altering the principle. 

The advocates of this system, which has been indepen- 
dently suggested from several quarters, urge that it offers, 
all the advantages of bimetallism while reducing its dan- 
gers to a minimum. The reply of the gold monometallist 
is that these advantages of bimetallism are not so great as- 
to warrant us in exposing ourselves to even a fraction of its 
dangers ; that the artificial character of the system opens- 
the door for abuse of government powers ; and that unless 
it were adopted by concurrent action of all the commercial 
nations of the world, it would give rise to fluctuations in 
exchange and complications in the fulfilment of inter- 
national contracts which would more than neutralize any 
benefits which we might expect from it. 

4. Free coinage of silver at the old ratio of 16 to I, or 
even I5|- to i, regardless of what becomes of gold. 

This is the policy urged by those who see the evils of con- 
tracted currency so clearly that they have no vision left for 
the much worse evils which would follow the adoption of 
some other plans. They attempt to correct a compara- 
tively slight ill by an indefinitely worse one. 

§ 248. If free silver coinage were adopted we should find 
ourselves using a currency different from that of the other 



226 MONEY. 

nations with which we deal. The currency of the United 
States would be exposed to the full stress of any future 
changes in the conditions of silver production. If its sup- 
plies were stopped, we alone should have to bear the con- 
traction ; if its supplies were increased the whole inflation 
would come upon our markets.' As matters stand at 
present, an increase of a supply of gold in one country 
causes a momentarily higher price level in that country, 
but this high price level makes it a good market to sell 
in and a bad market to buy in. People bring goods from 
abroad and take away gold. Prices adjust themselves 
nearly to their normal level. If the world's increase in 
gold coin has been so large that the whole effect cannot 
be neutralized in this way, the change, such as it is, is 
shared by the different trading countries alike, and does 
not affect their commercial relations one with another, 
either in the matter of imports and exports or in the more 
important matter of interest payments. But if we used 
a different currency from that which was accepted by the 
nations of Europe, we could not dispose of a surplus ex- 
cept with great delay and inconvenience and after fluc- 
tuations in prices almost if not quite as great as those 
to which we were liable in our time of irredeemable 
paper money. 

§ 249. Moreover, such a currency would not be univer- 
sally acceptable even in our own country ; and the con- 
traction of credit which would result from its use would 
•outweigh any apparent gain from increase in the cur- 
rency. No man can be compelled to lend against his will ; 
and if he is liable to be paid in unacceptable coin, he will 
either refuse to lend or charge a high rate of interest. 
Those who lay most stress on the injustice of the de- 
monetization of silver overlook the fact that the saving on 
interest payments to the borrowers of this country since 

' We should have nominal help from a few silver-using countries, but their 
demand for additional currency is so small as to be scarcely worth counting. 



CHANGE OF STANDARDS. 22/ 

1873 has done much to counterbalance their loss on the 
appreciation of the principal. The borrowers have taken 
with one hand and given with the other ; the low bor- 
rowing rate has been dependent on the acceptability of 
the terms of the loan. 

§ 250. In the third place, the change would create a 
sudden alteration of the relative positions of debtor and 
creditor which would involve a disastrous violation of 
equity and give the future credit of the country a blow 
from which it would require years to recover. Its adop- 
tion would at once scale down all debts to much less than 
their present value. Our experience under the Sherman 
Act shows that free coinage on the part of the United 
States, or any single nation, could hardly be expected to 
raise the cost of a silver dollar to a point much higher 
than two-thirds of the cost of the present gold dollar. 
The resulting depreciation of the dollar Avould from its 
suddenness be infinitely worse than any gradual appre- 
ciation which has taken place during the last twenty 
years. 

It is not a question whether it Avould have been more 
equitable to have had continuous free coinage of silver 
and let people adjust their contracts and interest rates 
accordingly, but whether we can properly scale down to 
a silver basis contracts which were made under the ex- 
pectation that the country would be on a gold basis. 
Such a change once made would create a liability of 
similar changes in the future, and would make the nego-* 
tiation of loans or of long-time contracts enormously 
difficult. Any apparent gain to the debtors would be 
much more than offset by the difficulty of borrowing 
capital in the future ; a difficulty which could be avoided 
only by abandoning the use of a discredited currency and 
employing some other standard than the legal tender 
fixed by statute. 

§ 251. Even greater dangers than those connected with 



228 MONE Y. 

the free coinage of silver are involved in the proposal that 
the government should undertake to furnish the people 
the quantity of money that may be needed by the issue 
of paper which is a legal tender. Some of the plans for 
this purpose arrange for the assumption of banking func- 
tions by the government ; these are discussed in the next 
chapter. Others contemplate the direct issue of legal 
tender notes without the pretense of a banking reserve. 
Under each and every plan the existence of a currency 
whose volume and purchasing power are regulated by 
the discretion of the government exposes the people to 
the most serious dangers. 

Three motives combine to cause unwise and spasmodic 
inflation of paper money of this kind : 

1. A fiscal motive which leads governments to issue 
such money as a means pf paying expenses without taxa- 
tion. 

2. A constant pressure from the debtor classes, which 
form a large and frequently a most influential element in 
the body politic, for an increased volume of legal tender 
money. 

3. A general popularity of such issues among those who 
look only at surface effects, and who observe a certain 
temporary prosperity to which they give rise, without 
foreseeing the inevitable reaction, or tracing it back to 
its proper cause when it finally comes. 

§ 252. Whatever momentary ease may be derived from 
inflation proves to be dearly purchased. If a government 
resorts to this method as a ready means of settling cur- 
rent accounts, all persons who have dealings with the 
government will make charges for future supplies at 
prices high enough to cover the risk ; or they may go so 
far as to insist on payment in coin, which can only be 
obtained by borrowing at a rate of interest much higher 
than would have prevailed in the absence of inflation. 
The history of the United States in the Civil War shows 



INFLATION AND LOANS, 229 

how great was the real increase of debt due to the use of 
paper money. Such instances might be indefinitely mul- 
tiplied. Events take the same course in the transactions 
of private debtors. To many of these debtors inflation 
may give momentary ease. If a man has commodities to 
sell and debts to pay, anything which increases the price 
of his goods makes it possible for him to pay a larger 
amount of debts with a given amount of products. But 
if he has no such products to sell, he is neither better nor 
worse off than he was before ; and if he wishes to con- 
tract new debts he suffers exceedingly from the change. 

§253. The reason for this is not always apparent to a 
superficial observer. He thinks that he wants to borrow 
money, and that therefore if there is more money he will 
find it easier to get. In point of fact, he does not want 
to borrow money, but capital.' If he has land to improve, 
he wishes to invest a certain amount of capital in its de- 
velopment. If he has a factory to build, he wishes to buy 
bricks and mortar and machinery and put them into use. 
If the currency is inflated and the number of dollars in- 
creased, he will have to borrow more dollars in order to 
obtain the same amount of capital. If the currency of the 
country has increased fifty per cent, and the general level 
of prices has correspondingly risen, making it easier for 
the old debtors to pay their debts, the borrower who 
needs $1000 on the old basis will now have to borrow 
$1500. The demand for money will thus keep pace with 
the artificial increase of the supply. Meantime, the risk 
attendant upon lending money will have become very 
great, since a government which has once begun to in- 
flate the currency will be liable to do it again. Some 
men will be unwilling to lend money at all and will insist 
on using it themselves ; others will demand additional 

* There is an exception in a panic or other similar emergency where people 
are seeking means of payment rather than means of investment. In such 
cases, issues of money may, for the moment, prevent interest from rising. 



230 MONEY. 

rates of interest as a means of insurance against possible 
loss from further depreciation of the currency. The tim- 
idity of those capitalists who are afraid to invest at all 
will enable those who actually do invest to demand and 
receive these high rates of interest. Instead of lightening 
the future burdens of the debtor classes, it will tend to 
increase them ; for capitalists, if they lend at all in a 
country with " political money," will almost certainly 
over-insure themselves by demanding exorbitant interest 
rates. No usury law can stop this process without still 
further lessening the amount of capital available for 
borrowers, thereby hindering the development of the 
country in question. 

§ 254. Meantime, any general stimulus to business, 
which shows itself as an immediate result of inflation, is 
rapidly exhausted. During the period when prices are 
rising, there is often great business activity, and products 
change hands rapidly. Everybody can make so much 
money by his sales that he does not enquire too closely 
into the purchasing power of the money thus received. 
Consequently the products on hand are quickly disposed 
of, and labor is actively employed to make new ones. The 
public enjoyment is large in proportion to the public 
capital because people spend freely and content them- 
selves with a small real profit under the guise of a large 
apparent one. But when prices have ceased to rise, the 
illusory character of these profits makes itself felt. Peo- 
ple find that their investments are not worth what was 
supposed. A reaction sets in which diminishes the utili- 
zation of the national capital even more conspicuously 
than the inflation increased it. An attempt may be 
made to stave off this reaction by further issues of cur- 
rency ; but there soon comes a time when these issues 
are discredited and when the reaction becomes more 
severe from the efforts which have been made to post- 
pone it. The stimulus of inflation is like that of alcohol 



INFLATION AND WAGES. 23 1 

or opium ; the ensuing depression can be temporarily 
averted by increasing tiie dose, but at the expense of 
making the final collapse more ruinous. 

§ 255, Under these circumstances, the proportion of 
legitimate transactions is diminished, and the amount of 
speculative or gambling transactions largely increased. 
Business becomes less of a certainty and more of a game. 
The whole country becomes poorer under conditions 
which prevent conservative borrowing and safe invest- 
ment. Perhaps the greatest sufferers of all are the work- 
ing classes. They accept gladly an increase in money 
wages, not noticing that the purchasing power of that 
money has decreased faster than its nominal amount has 
increased. An examination of statistics during the Civil 
War shows that under inconvertible paper currency, 
though the nominal wages of the workmen increased con- 
siderably, the amount they could purchase with a day's 
wages was decidedly reduced. And if the speculative ac- 
tivity under these circumstances sometimes causes the 
working force of the community to be more fully em- 
ployed than it was before, it is followed by a reaction 
and a period of unemployment whose burdens more than 
counterbalance the transient gain. 

Of all the scientific students of currency questions, 
there is no one who emphasizes the needs of the debtor 
classes as vigorously as General Walker ; and Walker 
does not hesitate to say that the man who, having refer- 
ence exclusively to economic interests, advocates the scal- 
ing down of debts for the sake of encouraging trade and 
production, shows himself so ignorant of history as to be 
a wholly unfit adviser as to the present and the future. 



CHAPTER VIII. 

CREDIT. 

Checks and Clearings — Domestic and Foreign Exchange — Influence of 
Deposit Accounts on Prices — Note Issue and its Dangers — Attempts to 
Regulate Note Issue — The Government as a Banker. 

C. F. Dunbar: "Chapters on the History and Theory of Banking." 
New York, 1892. 

W. Bagehot : "Lombard Street, a Description of the Money Market." 
7th ed., London, 1878. 

G. J. Goschen : " The Theory of the Foreign Exchanges." 14th ed., 
London, iSgo. 

Those who wish to study the subject more thoroughly should acquaint 
themselves with the writings of Ricardo and with those of H. D. Macleod. 
Still more detailed are the six volumes of Tooke and Newmarch : " A His- 
tory of Prices and of the State of the Circulation, 1792-1856." London, 
1838-57. 

§ 256. The money which an individual uses in his 
business, though a necessary part of his capital, often 
seems like an unproductive one. If he can employ credit 
instead of cash as a means of making his payments, he 
has a correspondingly larger amount to spend in machin- 
ery and other permanent investments whose direct pro- 
ductive power is more obvious than that of money. What 
is true of an individual is at least equally true of a com- 
munity. If capital is scarce, the community makes every 
effort to use credit instead of money, so as to avoid the 
necessity of employing any part of its capital for conduct- 
ing exchanges. If the property of a certain town amounts 
to $100,000 and $20,000 of this must be used as a cash re- 

232 



REDUCTION OF CASH RESERVES. 233 

serve in order to transact the business of the place securely, 
the inhabitants often try to avoid the use of the $20,000 
in every way possible, so as to have the whole $100,000 
to spend for things directly serviceable in production and 
consumption, instead of $80,000 only. In other words, 
they try to get along with just as little actual money as 
possible. 

§ 257. It is sometimes thought that this is a sign of 
advancing civilization. We are told that people first pass 
through a regime of barter, where goods are exchanged 
for goods ; then follows the use of money as a means of 
transfer; and this in turn, in the highest stages of indus- 
trial evolution, gives place to credit. This last statement 
is hardly warranted by the facts. The tendency of recent 
times seems to be pretty clearly in the direction of an in- 
creased use of cash in mercantile transactions. It is in 
semi-civilized countries like Turkey that we see the fullest 
operation of the credit system. It is doubtless true that 
highly organized communities do some things on credit 
which less advanced communities cannot do at all. But 
when such operations have once become established, the 
tendency is toward an increasing use of cash in their con- 
summation ; a practice which saves time, saves waste, and 
saves middlemen's profits. Experience shows that the 
apparent advantages from the use of credit°are often out- 
weighed by less obvious but more real advantages from 
not using it. 

§ 258. The pressure to use little money and much 
credit makes itself felt in two distinct cases : 

I. In very poor communities, where the obvious needs 
for consumption are great, money in the cash drawer 
seems an unnecessary luxury. People are apt to spend 
all they have, and trust to getting more when more is 
needed. In this way they overreach themselves. They 
leave too little for effective use as a medium of exchange. 
By spending every cent they possess, they hamper 



234 CREDIT. 

production and exchange by constantly keeping their 
cash reserves at too low a figure ; somewhat as the 
improvident operative, who spends every dollar before 
he has earned it, keeps himself constantly in the power 
of credit stores which charge him an unfairly high rate for 
his accommodation. In a community of this kind we 
find an inadequate supply of money, a very low level of 
prices for cash, a much higher level of credit prices, and a 
commercial system so uncertain and cumbersome as to 
prevent people from serving one another most effec- 
tively and from selling their products in outside markets 
at the best advantage. 

2. Another cause of scant money supply is exemplified 
in communities of active producers. Such people spend 
their money, not for immediate personal consumption, 
but for various forms of capital which will tend to in- 
crease their wealth in the future. It is not because 
they are poor that they keep themselves scantily supplied 
with money, but because they hope to be rich by means 
of its investment. Where farms, railroads, factories, and 
other forms of productive enterprise seem to insure their 
owners a return of ten per cent, the temptation to use 
too much money in purchasing means of production and 
leave too little to serve as a medium of exchange is at 
times quite overwhelming. In such communities there 
is always an active attempt to develop a credit system 
which shall serve the place of money. 

§ 259. The simplest means of accomplishing this result 
is the use of account books and offsets. If A purchases 
stoves of ^, and B purchases coal of A, each transaction 
creates a debt. If y^'s purchases in the course of a year 
amount to $100 and ^'s purchases to $90, the debt can be 
settled by the payment of $10, and the use of money 
thus greatly lessened. But such a process is only avail- 
able where two people are dealing with one another. If 
A sells to B, B to C, and C to A, a. comparison of the 



BANK CHECKS. 235 

books and a system of offsets connected with it would in- 
volve so much time and uncertainty that it would proba- 
bly be easier to pay in cash. 

§ 260. The system of bank credits has been utilized 
to meet this difficulty. Suppose that y^, B, and C all have 
deposits in the same bank. A owes B $100, B owes C 
$90, C owes A $80. Instead of paying one another the 
money, each gives his creditor an order or draft on the 
bank for the amount of the debt. Such an order is known 
as a check. When B receives y^'s check he takes it to the 
bank ; and instead of collecting the money he has the 
sum credited to his account. Against this credit of $100 
we have to offset a debit of $90, which B has drawn from 
his account to pay C, leaving him $10 better off than he 
was before. C in like manner has a credit of $90 and a 
debit of $80 ; while A has a credit of $80 against a debit 
of $100, representing a net reduction of $20 in the value 
of his deposits. All of these transactions can be settled 
or " cleared " if the bank collects $20 from A and pays 
$10 each to B and C. Transactions to the amount of 
$270 would thus be effected by the use of $20 actual cash. 
In many instances, even this small amount can be reduced. 
B and C will leave their money on deposit instead of 
calling for the cash from the bank ; while A will make 
good his deficit, not by an actual deposit of cash, but by 
an excess of credits over drafts in the immediate future. 
A balance against him to-day will be offset by a similar 
balance in his favor to-morrow. The necessity for actual 
payments of cash to or from the bank will be diminished, 
if the accounts of different depositors are left to run from 
month to month. 

§261. \iA,B, and C deal with different banks, the same 
process of settling debts without the use of money is 
effected through the agency of a clearing house. If A 
has a deposit in the First National Bank, while B has a 
deposit in the Second National Bank of the same place, 



236 CREDIT. 

A pays B by giving him an order on the First National 
Bank, but B does not take it to that bank for collection ; he 
takes it to his own bank, and transfers to that bank by 
endorsement his title to the check, the bank meantime 
crediting him with a corresponding sum on his deposit 
account. This check, which was formerly an order from 
A to the First National Bank to pay $100 to B, is by this 
endorsement made an order to the First National Bank to 
pay $100 to the Second National Bank. In the course 
of the day each bank thus accumulates a large number of 
orders in its favor against other banks in the same place. 
These orders or credits are all sent to a clearing house, 
which does for the different banks the same work that 
the bank did for its individual customers in the case pre- 
viously supposed. Any bank that has an excess of 
orders in its favor over the orders presented against it 
is credited with the surplus ; while any bank that has a 
balance in the other direction is debited with the defi- 
ciency. By paying these small differences to the clear- 
ing house the banks can settle their obligations to one 
another with very little use of actual cash. If the 
accounts, instead of being settled every day, are allowed 
to go on for a week or month, the proportion of cash 
payments to checks cleared becomes exceedingly small. 

§ 262. For the successful operation of this system it is 
not necessary that the different banks should all be situ- 
ated in the same place. Every large city acts as a clear- 
ing centre for the country banks in the districts around it. 
New York, in like manner, acts as a clearing centre for the 
whole of the United States, and London for the whole of 
England. If Xin Albany wishes to pay a debt of $100 
to Fin St. Paul, he sends a check on his own bank in 
Albany. This check is an order to the Albany Bank to 
pay $100 to Y. F takes it to his bank in St. Paul, en- 
dorses it payable to the order of that bank, and receives 
the corresponding sum to the credit of his deposit account. 



THE CLEARING-HOUSE SYSTEM. 237 

The St. Paul bank sends it for collection to a bank in 
New York with which it maintains a deposit, endorsing it 
to the order of the New York bank, and is credited with 
a corresponding sum on its deposit account in New York 
City. The New York bank sends it to the clearing house 
for collection from some other New York bank which acts 
as agent for the Albany bank on which the check is 
drawn, and with which the Albany bank is presumed to 
have a deposit account. In the New York clearing house 
it now appears in the form of an obligation from one New 
York bank to another. It is credited by the New York 
clearing house to the agent or depositary of the St. Paul 
bank, and debited to the agent or depositary of the Al- 
bany bank. The New York bank which is thus debited 
with the check deducts it from the deposit account of 
the bank in Albany ; which, in its turn, on receipt of the 
check, deducts it from the account of its customer who 
originally signed it. In the New York clearing house, 
meantime, this check has gone in with a mass of other 
checks drawn in all parts of the country, and sent to 
all parts of the country, which in time reach New York 
in the form of claims of one New York bank on another. 
These claims are thus settled by the payment, to or from 
the New York clearing house, of insignificantly small sums 
of money representing the difference between the credits 
and debits of individual banks. 

§ 263. It is assumed in describing this transaction that 
the right to receive a given sum of money commands the 
same price, whether the payment be made in St. Paul, in 
New York, or in Albany. This assumption is not always 
fulfilled. If a great many people want money in the 
West, while comparatively few want it in the East, there 
will be an excess of checks calling for payments in one 
direction, and a deficiency in the other. Some money 
will have to be shipped westward ; and rights to receive 
money in St. Paul will be worth more than rights to cor- 



238 CREDIT. 

responding sums in New York or Albany, by a difference 
which may equal the cost of such shipment. These 
differences show themselves in the quotations for " do- 
mestic exchange." The bank which makes a payment in 
St. Paul, where money is scarce, and receives a claim on 
New York, where money is plenty, must either deduct 
this difference or pocket the loss. If it is dealing with a 
regular depositor it will probably do the latter. A loss 
at one season is likely to be made up by a corresponding 
gain at another ; and in any event the amount of such 
loss in domestic exchange is small as compared with the 
profit which the bank can make from a steady deposit 
account. 

§ 264. In foreign exchange the case is different. The 
cost of shipment is greater, giving a wider margin of profit 
and loss ; and the remittances are managed by houses 
which make them a direct source of income, instead of 
doing the work for nothing as a means of attracting 
deposit accounts. 

The bullion value of a pound sterling is $4.86|-; but 
the right to receive a pound sterling in London cannot 
always be bought or sold for that sum in New York. 
This will happen only when the payments which Ameri- 
cans wish to make in London are approximately equal in 
amount to those which Englishmen wish to make in New 
York. In that case the foreign exchange houses which 
have branches in both cities will sell drafts in each place 
payable by their branch in the other ; and the money 
received from the sale of the drafts in one direction will 
furnish the sums needed for paying those in the other 
direction as fast as they are presented. The competition 
of different houses with one another will prevent them 
from doing much more than this ; the profits of such 
remittances are made on a very narrow margin. 

§ 265. If there are more payments to be made in 
London than in New York, the London houses will find 



FOREIGN EXCHANGE. 239 

that they are called on for much money, and will find it 
hard to sell drafts on New York with which to obtain the 
means of payment. Their cash' reserves diminish just 
when they need them most. On the other hand, the 
New York houses find everybody desirous to buy drafts, 
which may prove a source of embarrassment at the Lon- 
don end of the transaction. They therefore raise the 
price of such drafts to $4.89 or thereabouts. It cannot 
go much higher than this, because two cents and a half 
covers the various items in the cost of shipping the gold — 
freight, insurance, etc., — and a man desiring to pay a debt 
in London will therefore ship the specie rather than pay 
a rate much above $4.89. 

If, on the other hand, there are more payments to be 
made in New York than in London, the New York houses 
are anxious to sell as many drafts as possible ; for they can 
thus obtain the means of fulfilling commercial engage- 
ments which their London houses can make with profit. 
To save the necessity of actual shipment of gold from 
London to New York, the New York houses will sell 
drafts as low as $4.83 ; the difference between this and 
$4.86|- representing the expense for freight, insurance, and 
loss of interest which they would incur by shipping the 
money. Exchange cannot go lower than this, for any 
further reduction would make it cheaper for the banking 
houses to meet their obligations by importing specie. 

§ 266. The limits of variation in foreign exchange are 
largely affected by the rate of discount (interest on short- 
time commercial loans) ' in the two countries. If the rate 
in New York is higher than in London, there will be a 
tendency to keep gold in New York for the sake of profit- 

^ If the interest on industrial investments (as distinct from commercial 
loans) is enough higher in New York than in London to overcome the disin- 
clination of English capital to emigrate, we shall see a movement of goods 
from England to America which is paid for by securities — commercial bills in 
one direction being balanced by financial transactions which offset them. 



240 CREDIT. 

able investment in short-time or demand loans instead of 
shipping it to London. Such a difference of interest rate 
will retard the movement of gold from New York to 
London when exchange is high, and accelerate the move- 
ment from London to New York when exchange is low. 
When a movement of gold from London seems imminent, 
an increase of the Bank of England rate of discount is 
sometimes made for the purpose of checking the antici- 
pated outflow, and is usually successful in accomplishing 
its end. 

§ 267. Besides selling drafts, the houses engaged in the 
business also hiy exchange, advancing money in New 
York on bills that are to fall due in London sixty days 
hence, and vice versa, at a discount corresponding to the 
period which must elapse before collection. Besides the 
profit due to this discount, the foreign exchange houses 
may reap an advantage from foresight in predicting 
movements in exchange. For it may happen that the 
abundance of bills on London in New York to-day which 
causes them to be sold at a low rate will be followed by 
a reverse condition two months hence. In that case the 
collection of the sixty-day bill in London will give the 
banking house the money at just the right time and place, 
and put its resources where they are needed. Such anti- 
cipations of future wants, when correctly made, lessen the 
necessity for gold shipments and result in public conven- 
ience as well as in private profit. For, unless a country is 
a large producer of gold, an outflow of the metal at one 
season is very apt to be balanced by an inflow at another. 
The withdrawal of a large supply of money would tend to 
make prices lower than they were the year before. This 
would make the country a good market to buy in and a 
bad market to sell in. It would increase the exports and 
diminish the imports far more effectively than any tariff 
ever devised. People would take away goods and leave 
gold in their place until the old price level was reached. 



ARBITRAGE. 24 1 

If a foreign exchange house can foresee this prospective 
return of the metal and content itself with sending rights 
to money by mail instead of shipping the metal itself, it 
can save the public the loss involved in the double move- 
ment of money back and forth, 

§ 268. It is not necessary that we should receive the 
money back from the same country to which we send it. 
If we ship gold to England and England ships it to Brazil, 
Brazil may ship it back to the United States. And simi- 
larly, if we remain indebted to England and England re- 
mains indebted to Brazil on the current exchange account, 
the whole affair will settle itself without movement of 
money if Brazil becomes indebted to the United States. 
The competition of arbitrage brokers (§ 117) with one 
another enables the most roundabout transactions to be 
adjusted (usually through the medium of London as a 
clearing house) at a very small margin of expense, and 
with comparatively little shipment of specie. 

§ 269. The credit system as thus developed affords twO' 
quite distinct advantages to the public. In the first place 
it furnishes a convenient method of payment, which 
avoids the risk attendant on remittances of specie or 
even of government notes. In the second place it saves- 
the wear and tear incident to the use of metallic money ;: 
and more important still, it saves the interest on the capi- 
tal which would be represented by a large mass of unnec- 
essary coin. It is also attended with profit to the bankers, 
independent of the commissions which they may charge 
on exchange. A bank knows that all the people who 
have the right to draw checks upon it will not do so 
in a single day, and that even if checks are drawn by 
a great many of them, others will make deposits which 
will balance the losses. If every bank had to keep a reserve 
of coin equal to the total amount of checks that might 
be drawn upon it, the check and clearing-house system 
would save the public the trouble of handling money, 



242 CREDIT. 

but would not save interest on idle capital or give any 
profit to the bank. But no bank finds it necessary to 
keep a reserve of one hundred per cent of all its liabili- 
ties. Experience proves that a bank which keeps a cash 
reserve equal to one-third, or even to one-fourth of its 
deposits, is prepared for all contingencies that are likely 
to arise.' 

§ 270. The proper amount of this reserve will vary 
according to the circumstances of the bank. A savings 
bank (§ 154) can work with a very small' amount of cash. 
It does not encourage its depositors to draw drafts upon 
it and use them as means of remittance. In fact, most 
savings banks expressly reserve the right to refuse pay- 
ment of such drafts for a considerable length of time. 
The savings bank is essentially a means of investment 
rather than of convenience in payment or economy of 
currency. It attracts funds from depositors by the offer 
of interest. It invests a large proportion of those funds 
in long-time loans, chiefly on real estate, and it keeps on 
hand only a sufficient amount of cash or easily collectible 
assets to meet a few drafts from those persons who wish 
to reduce their deposit accounts. But a commercial bank 
of the modern type encourages its depositors to draw 
checks upon it, and gives them every conceivable facility 
for using such checks as a means of remittance of money. 
It must therefore hold a larger reserve of cash to meet 
such drafts ; and its investments, instead of being of a 
permanent character like those of a savings bank, are put 
into assets that will mature quickly, so that in case of any 
sudden call on its funds in excess of the ordinary cash 
reserve it can at once secure the means to meet all de= 
mands. There is no standard proportion between reserves 

' The theory of modem banking was apparently first formulated by 
Alexander Hamilton. It is most fully developed in the works of H. 
D. MacLeod, especially his " Theory and Practice of Banking," London, 
1856. 



DEPOSITS AND DISCOUNTS. 243 

and liabilities. Everything depends on the situation of 
the bank and the kind of business that it is doing. City 
banks, as a rule, need a larger reserve than country banks. 
Account is taken of this difference in the United States 
National Banking Law, which requires the banks of the 
larger cities to keep a reserve of twenty-five per cent on 
all liabilities, while those in the rest of the country are 
only required to keep one of fifteen per cent. In places 
where a large reserve is kept, the banks as a rule do not 
pay interest on deposits. They cannot afford to do it. 
Besides, the very existence of a large reserve shows 
that they are constantly called upon to furnish facilities 
to their depositors in the payment of debts by check. 
This consideration is sufficient to attract depositors with- 
out the offer of interest. The country banks, on the other 
hand, and the loan and trust companies — which are some- 
thing intermediate between true banks and savings banks ' 
— frequently offer a small rate of interest on deposits of 
any considerable amount and duration. 

§ 271. In any good banking system, most of the de- 
posits used as a means of payment by check are founded 
on the transactions which create the necessity for such 
payment ; so that the credit given is made proportionate 
to the occasion for its use. A bank invests its capital to 
a very great extent in commercial paper. If a retailer 
wishes to deal in stoves and has not at the moment the 
money with which to buy those stoves from the manu- 
facturer, he can pay for them by accepting a bill due at 
ninety days from the date of the purchase. The manu- 
facturer takes the bill to the bank, where he endorses it — 
that is to say, guarantees that he will make it good to 

^ In the original conception, a trust company should not receive deposits 
subject to check, but should chiefly occupy itself with handling trust funds, 
in which case it can make long-time investments like those of a savings 
bank ; but most of the large American companies of this kind hold deposits 
subject to check, discount a considerable amount of commercial paper, and 
perform all the important functions of a bank except that of note issue. 



244 CREDIT. 

the bank if the dealer does not — and then has it dis- 
counted. ' In this transaction the bank credits him with 
the face value of the bill less ninety days' interest. If 
the discount rate is six per cent and the bill is accepted 
for $ 1,000, the bank deducts three months' interest at six 
per cent, $15, and credits the manufacturer with $985. 
Theoretically, the manufacturer can have this money 
given to him in cash at once ; but if he did this without 
some exceptional reason the bank would not be likely to 
discount bills for him in the future. He leaves it on de- 
posit, drawing checks against his account as he has need of 
funds. The bank is reasonably sure that the total amount 
of checks drawn in a single day will form but a small 
fraction of its whole deposits. It therefore keeps but 
$200 of the $985 as reserve, and can use the balance as a 
means of discounting other bills. In due time the manu- 
facturer's account is exhausted ; but at the end of three 
months when the bill matures, the bank will receive 
$1,000. This gives the bank a profit on the transaction 
which compensates it for the trouble and risk involved,, 
and for the loss of interest on the comparatively small 
reserve which it has been compelled to maintain. 

§ 272. Accepted bills are not the only kind of security 
on which a bank makes advances ; but it is desirable that 
the bulk of the paper discounted should be of this nature, 
if not of this form. It should represent a need of money 
for current transactions on which the profit is to be real- 
ized in a comparatively short space of time. Whenever 
there is a pretense of this without the reality there is a 
decided danger to the bank. When parties are found to 
be drawing what is known as accommodation paper, — 

^ This process is sometimes accomplished through the agency of a bill 
broker, w\iO borrows a large part of his capital, from the banks and buys 
bills created by transactions which he watches more closely than the board 
of bank directors finds it possible to do. By charging his customers a 
slightly higher rate of discount than the bank charges him, he can make a 
small margin of profit on such operations. 



AN ELASTIC CURRENCY. 245 

accepted bills on the basis of fictitious transactions instead 
of actual ones, — well managed banks generally refuse to 
have further dealings with them. 

§ 273. The public service rendered by the banking sys- 
tem bears some analogy to that of the ordinary commer- 
cial speculator. The speculator sells products which he 
does not now have, on the carefully considered expecta- 
tion of obtaining them in the future. He thus enables 
the existing stock of such products in the community 
to be more effectively utilized (§ 119). In like manner 
the banker atgrees to deliver more money than he has in 
hand, with the expectation of obtaining such money to 
advantage when he needs it. He thus allows the stock 
of money in the community to be more fully utilized, and 
makes it unnecessary to carry so large an idle reserve. 
The bank also performs a work of insurance, though of 
somewhat different character from that done by the spe- 
culator. It may be said to insure credit. If it discounts 
a three months' note and allows the maker to draw checks 
upon the sum with which it credits him, it protects the 
public, which accepts such checks, from the risk of sub- 
sequent insolvency on the part of the maker. It is 
because this insurance is effective that the public will 
accept checks where it will not accept promissory notes. 

The use of bank deposits as means of current payment 
gives elasticity to the currency. To see what this means, 
let us consider the case of a nation doing its business 
without bank checks. If progress in the arts, or immi- 
gration, or an unusually good harvest creates a necessity 
for an increased number of transactions, a scarcity of specie 
will probably ensue. A larger volume of business cannot 
readily be done with the old amount of money, unless 
means are devised to make it circulate more rapidly. In 
default of such means prices will fall ; and although this 
fall in prices will probably work its own cure by bringing 
in specie from other communities (§ 222), the process 



246 CREDIT. 

will be attended with some hardship. But if these addi- 
tional transactions furnish a basis for the discount of bills 
and increase of bank deposits, they can be settled by 
drawing checks with comparatively little use of money. 
The price level will thus remain stable, the need for 
additional gold will be reduced to a minimum, and the 
industrial growth of the community can go on unhindered. 
§ 274. In looking at the advantages of this method of 
payment, we must not lose sight of its dangers. The dis- 
counts of the banks may not merely keep pace with the 
growth of business, but exceed it. Credit may be em- 
ployed, not as a supplement to money, but as a substitute 
for it.^ If it becomes easy to obtain the accommodation 

^ The view here advanced is intermediate betvs^een those of Walker and 
of Mill. Walker holds that checks have very little effect on the general 
price level ; Mill thinks that they have substantially the same effect as 
money and exactly the same effect as bank notes. 

Walker's position is as follows : The general level of prices is determined 
by the supply and demand of the meditim of exchange — either coin or notes 
which circulate from hand to hand. On the price level thus created, there 
are a number of credit payments which cancel obligations without the use 
of money ; but the credit instruments used for this purpose originate in the 
transactions to be settled, and disappear when the business which occasions 
their use is finished. Therefore checks are supplementary instruments of 
trade, which do not affect the money supply or demand and can have no in- 
fluence on prices, (Walker counts bank notes as actual money.) 

Walker seems to overlook the fact that there are a great many transac- 
tions for which money or checks can be used indiscriminately ; transactions 
which people will settle by coin if they cannot use bank credit, but which 
will be paid by checks when public confidence is good and bank accommo- 
dation ample. The use of credit for this purpose has the effect of dimin- 
ishing the demand for money. 

Mill apparently goes too far in the other direction. Instead of treating 
checks as a partial substitute for money, he reasons as though they were a 
universal suhsiiivLie. Because an individual can use cash or credit indis- 
criminately, he argues that a nation can do the same. This inference is 
not fairly warranted. The individual can convert his credit into cash, with 
little or no loss, because commercial credit is backed by a considerable cash 
reserve in the banks, and no single depositor or noteholder has large enough 
credits to reduce that cash reserve very seriously by his personal demands 
upon it. He can therefore treat cash and credit as equivalent. But if too 



DANGERS FROM ELASTICITY. 247 

at the banks, a large number of transactions will be made 
on credit. The checks which result from the creation of 
such bank credit furnish a medium of exchange almost as 
efficient as money. The over-abundance of a medium of 
exchange in this form will make it easier to get money 
than it was before. This will tend to raise prices. Where 
this process is once begun it goes on by its own momen- 
tum. When stoves are worth $10 apiece, a bill for one 
hundred stoves can be made the basis of a bank credit 
of only $1,000. But if the use of bank credit raises the 
general price level, stoves may soon be sold for $12 in- 
stead of $10; in which case the next lot of stoves will be 
made the basis for a credit of $ii200 instead of $1,000. 
This concurrent increase of credits and prices may con- 
tinue until the liabilities of the banks become dispropor- 
tionate to their reserves. When the public perceives this 
there is a sudden shock to confidence and a withdrawal 
of accommodation which causes far greater distress than 
would have resulted had the facilities of payment by credit 
been less elastic at the outset. 

§ 275. This danger is very much greater when bank 
credit takes the form of notes instead of checks. 

We have thus far assumed that when a bank discounts 
a bill it gives as consideration a credit or deposit account 
against which checks can be drawn. The bank may, how- 
ever, with equal advantage to itself, pay out over its 
counter a corresponding amount of notes. In these notes 
the bank agrees to pay to the bearer on demand a sum 
of money corresponding to the face value of the note. 
From the standpoint of the bank, a note is exactly like a 

many individuals try to do this at the same time, the conversion is often at- 
tended with difficulty and loss. The domain within which the two things 
can be used interchangeably is after all a rather narrow one ; and an en- 
largement of this domain can be effected only by a rather slow change of 
commercial habits. Therefore, while bank credits have the same kind oi 
effect on prices as do additional issues of money, it will hardly do to assert 
that they have the same effect. 



248 CREDIT. 

deposit account. $985 of notes imposes on the bank pre- 
cisely the same obligation as $985 of deposits ; namely, 
the obligation to pay that amount of coin whenever the 
evidence of the right to receive it is presented. But 
upon the public the note may have a very different effect 
from the deposit account. Credit given in the form of a 
deposit account is exhausted in a short time, because the 
checks drawn against it soon come back to a bank for 
redemption. But credit in the form of notes may remain 
outstanding for an indefinite period. These notes may 
change hands a thousand times before returning to the 
bank. Where a check settles a single transaction, a bank 
note of the same value may settle a very large number. 
There are also practical limitations to the undue expan- 
sion of credit in the form of deposits which are by no 
means equally effective in case of notes. If a bank is 
tempted to increase its deposit accounts more than the 
business of the community warrants, and tries proportion- 
ately to augment its coin reserve, this process soon finds a 
natural limit from the difficulty of getting coin. The peo- 
ple themselves, outside of the banks, need to use a certain 
amount of coin. If the banks try to encroach on this 
amount for their own purposes, a stringency makes itself 
felt. But if the banks are increasing their note issues 
instead of their deposit accounts the people will use these 
notes as a reserve in their pocket-books and let the banks 
withdraw coin from actual circulation without observation 
on the part of the public. All of these things make bank 
notes a more dangerous medium of inflation than bank 
checks, even if a proper reserve is maintained. This 
danger is greatly enhanced by the probability, almost 
amounting to a certainty, that in the absence of special 
legislation the proper reserve will not be maintained. In 
a new country, where money is wanted, the issuing of 
notes is regarded as a patriotic function, which promotes 
the growth of the region and renders it independent of 



REACTION FROM OVERCONFIDENCE. 249 

the money lenders of older communities. The presenta- 
tion of bank notes for redemption, which would compel 
the banks to keep a proper reserve, is condemned by an 
unwise public sentiment as tending to injure the growth 
of local trade. The bank officials are . thus actively en- 
couraged to do business with an inadequate supply of 
cash. The worst abuses of the bank note system have 
been made with the connivance, if not with the active 
participation, of the communities in which they were 
carried out. 

§ 276. If prices begin to increase, from any cause what- 
soever, this increase furnishes a ground for an enlarged 
issue of notes on the same physical volume of -business. 
This goes on until prices and currency both become so 
inflated that people see the danger, and suddenly refuse 
to accept the notes as the equivalent of money. If the 
note issue is very large in proportion to the coin avail- 
able, such a change of sentiment may come at almost 
any moment. A bank failure is sure to precipitate it ; a 
large commercial failure not infrequently has the same 
result. When prices have risen on the basis of an arti- 
ficially increased amount of the medium of exchange, a 
great many people make contracts which can only be ful- 
filled, and plans which can only be successfully carried 
out, on the assumption of continued public confidence — 
not to say over-confidence. Under such circumstances, 
the whole industrial community lives in daily peril from 
every kind of event which can shake this confidence. 
Even a slight shock to credit may result in a severe com- 
mercial crisis, with a long list of failures, and a long 
period of industrial prostration. 

§ 277. Of course, bank note inflation does not always 
lead to such serious disaster. It may be stopped before 
the crisis is reached. If it is purely local in its extent, it 
is almost certain to work its own cure. If the banks of a 
single locality put out an unusually large number of notes 



250 CREDIT. 

in proportion to the wants of trade, coin is driven to 
other localities so rapidly that people take warning at 
once. Even if a whole country is flooded with increased 
bank note issues, the automatic movement of money to 
other countries, (^escribed in the last chapter, may give 
the alarm in time to prevent more serious evils. But 
where there is no such outlet, and where, as not infre- 
quently happens, the whole world is more or less involved 
in simultaneous inflation, there is no marked change in 
the movement of coin from one country to another, and 
no warning is given until it is too late to profit by it. 
We find that the great commercial crises of the present 
century have been preceded by periods of inflation which 
have simultaneously involved a large part of the civilized 
world. 

§ 278. No method of organization of the banking system 
has been devised which will avoid these evils. Local 
banks and centralized banks have alike been subject to 
them. It is urged by the advocates of local banks that 
they will know what are the needs of their customers ; that 
they will issue just enough currency to meet these needs; 
that this currency will only circulate in a region for which 
it is specially destined ; and that when money becomes 
redundant in that region, the evil will work its own cure. 
This argument depends for its force upon the assumption 
that the local banks of different regions will choose dif- 
ferent times for increasing their issues. As a matter of 
fact, there is every probability that they will do it at the 
same time in a large number of regions. Under such 
circumstances each community will be able to float an 
increasing volume of money as long as confidence con- 
tinues. The local character of the currency may prove 
an actual disadvantage in more ways than one. As it 
does not go far from home, it will circulate altogether 
too freely among people who have a patriotic pride in not 
presenting it for redemption. In the old days of state 



CONTROL OF NOTE ISSUE. 2$ I 

bank issues, the customer who tested the solvency of a 
bank by presenting its notes for redemption was looked 
upon in the light of a public enemy. If he wanted coin 
for foreign travel or any purpose for which the local bank 
issues were unavailable, he was obliged to explain his 
reasons in order not to become an object of suspicion. 
These disadvantages, combined' with those which arise 
from the absence of any power of control on the part of 
the central government, usually outweigh the merits 
claimed for local banks of issue. 

§ 279. Centralized control of banking and bank note 
issues has worked somewhat better ; yet it has by no 
means avoided the evils and dangers which have been 
described. The United States banks of 1791 and 1816 
had a checkered career, and did much to heighten specu- 
lative activity at the very times when restriction of such 
activity was most needed. Even the Bank of England 
has more than once been open to a similar criticism. 
Experience proves that the mere existence of ceiftralized 
organization is not enough to prevent abuse unless strict 
legislative limits are placed on the issue of bank notes. 

§ 280. The actual choice between local and centralized 
banking has usually been determined by political consid- 
erations rather than by economic ones. When a govern- 
ment has needed the help of a strong banking house, in 
order to borrow money or perform other necessary finan- 
cial operations, it has given special privileges to any bank 
or group of banks that would help it in this matter, and 
has correspondingly restricted all bankers outside of such 
an association. When, however, the immediate financial 
need is over and the local demands for increased banking 
privileges prove strong, the government has usually been 
unable to resist the pressure of such local demands, and 
has annulled or modified the exclusive privileges given in 
times of financial stress. Only after long experience of 
the evils of both systems have nations learned to develop 



252 CREDIT. 

well defined lines of legislative policy whieh are guided 
by far-sighted commercial intelligence rather than by the 
pressure of political influence. 

§ 281. The Bank of England was established in 1694. 
It grew out of the necessity of the English government 
for a loan of i^ 1,200,000. In 1708 it was given an impor- 
tant monopoly by an act prohibiting companies of more 
than six persons, with the exception of the Bank of Eng- 
land, from issuing notes or bills of credit. This restriction, 
however, did not extend to Scotland or Ireland. In the 
latter country especially, bank note issues of large amount 
were put forth by irresponsible parties. Nor did the 
restriction of 1708 sufifice to prevent the issue of notes by 
country banks in England. At the close of the last cen- 
tury, the English bank note currency was so inflated that 
a crisis took place in 1792 and 1793, and a suspension of 
specie payments in 1797 which lasted for twenty-four 
years. In spite of the experience of this period, the 
directors of the Bank of England made no efificient 
^attempts to check the speculation of the years 1824 
and 1825. ^^ September of the latter year there was 
a severe commercial crisis, which at one time threatened 
to reduce the country to a state of barter. Amid the 
efforts to prevent the recurrence of such evils there was a 
temporary movement in favor of decentralized banking ; 
but it accomplished very little. No radical reform was 
effected until Sir Robert Peel's Act of 1844. By this 
Act discretionary power over the issues of paper money 
was taken out of the hands of English bank author- 
ities. The country banks were absolutely forbidden to 
increase the small circulation which they had outstand- 
ing at the time of the passage of the Act. The Bank 
of England was allowed to issue ;^ 14,000,000 (afterwards 
increased to ;^ 16,000,000 to take the place of circulation 
surrendered by some of the country banks), on the basis 
of securities, chiefly British Public Funds, which it held 



BANK NOTES IN ENGLAND. 253 

in its coffers. Every note beyond this was to be based on 
an equal amount of coin or bullion placed in the hands of 
the bank. If the Bank of England has ^28,000,000 of 
notes outstanding, it indicates that there are ^12,000,000 
of coin or bullion on deposit in the bank. It is not 
allowed to vary its note issue on the basis of the wants of 
trade, real or supposed. Changes in the amount of notes 
outstanding are based on equivalent changes in the 
amount of coin deposited. To all intents and purposes 
the Bank of England notes are of the nature of gold cer- 
tificates (§ 214). The Act of 1844 makes the volume of 
currency in Great Britain depend on movements of coin 
or bullion, and not on the discretion of bank authorities 
in issuing notes. 

This Act was vehemently criticised at the time of its 
passage. Its opponents urged that a currency which was 
secured by proper banking reserves ^ would be equally 
convertible with that contemplated by Peel's Act and 
much more elastic. This criticism found considerable 
confirmation in England's experience during the crises 
of 1847, 1S57, and 1866. On two of these occasions the 
restriction on the note issues of the Bank of England was 
suspended by authority of Parliament, and a discretionary 
power was given which it had been the purpose of the 
Act of 1844 to take away. In the third, measures were 
taken by bank authorities which were based on the prob- 
ability of such parliamentary action. In all these cases 
the bank issued notes more freely than was consistent 
with the operation of the Act of 1844, thereby relieving 
commercial stringency and preventing great public cal- 
amities. Yet this fact, as we shall presently see, does 
not prove that the Act was useless or undesirable. 

§ 282. In Scotland there was no such monopoly of note 

^ Notes thus protected are said to be secured on the " banking principle," 
while notes which can only be issued on an actual deposit of coin are pro- 
tected by what is known as the " currency principle." 



254 CREDIT. 

issue. Banks were allowed discretion to advance notes to 
individual borrowers. The convertibility of the note and 
the solvency of the bank were thought sufficient safe- 
guards to prevent the danger of over-issue. The system 
seems to have worked well ; but the Act of 1844 was ap- 
plied to Scotland as well as to England and took away 
the rights of the banks to make uncovered issues beyond 
the amount then outstanding. The principle of the old 
Scotch system is carried out in Canada at the present 
day. The Canadian banks are allowed to issue notes up 
to the limit of their capital. Every facility is afforded 
the note holder to present his notes for redemption ; and 
it is believed that this facility of redemption furnishes an 
adequate safeguard against inflation. 

§ 283. The Bank of France was established at the 
beginning of this century. Down to 1848 it shared the 
right of note issue with certain departmental banks. By 
laws passed in that year these banks were consolidated 
with the Bank of France, which has since had a monopoly 
of the note issues in that country ; a power which it has 
on the whole exercised with great wisdom. During much 
of its history there has been no statutory limit to its note 
issue ; the existing limit is about $800,000,000.' 

§ 284. Prior to the consolidation of the German Empire, 
the banks of that country were necessarily local, and their 
issues could circulate in comparatively small districts 
only. The establishment of an imperial bank in 1875 was 
dictated by considerations of national policy. The local 
bank note issues were not stopped, but are subjected to 
strict control, and the imperial bank has charge of nearly 
two-thirds of the note circulation of the empire. One- 
third of the note issue must be protected by a coin re- 
serve. If the difference between the issue and the reserve 
exceeds $70,000,000,^ an annual tax of five per cent is 
levied upon the excess. More reliance seems to be placed 

' 4,000,000,000 francs. ^ 296,000,000 marks. 



BANK NOTES IN AMERICA. 255 

on general supervision of the management of the affairs 
of the bank, and less on specific restrictions affecting the 
reserve or the note issue, than is the case in England 
or the United States. 

§ 285. The first United States bank was established in 
1 79 1, chiefly for the purpose of assisting the government 
in its financial operations. Its charter expired in 181 1 ; 
but in 1 8 16 a second bank was organized on a similar "plan 
and with the same general objects. The formation of 
the United States bank simply established an accredited 
fiscal agent of the government ; it did not prevent note 
issues by state banks. These issues were large in amount 
and badly secured. The charter of the second United 
States bank, owing to the opposition of President Jackson, 
expired in 1836, but it continued business under the laws 
of the State of Pennsylvania, and took an unenviable part 
in the speculations which led to the commercial crisis 
immediately following. No United States bank was 
afterward established ; but the issue of state bank notes, 
usually with inadequate supervision, continued until the 
Civil War. 

§ 286. The first improvement in the state bank system 
originated in Massachusetts, where a number of banks 
established a common agency for the redemption of 
notes, with a view to the prevention of irresponsible 
issues. A further reform was made in New York in 1838, 
by a law which compelled the banks to hold United States 
or state securities, or real-estate mortgages, of an amount 
equal to the value of the notes issued, and to deposit 
them with the State Treasurer as a pledge for the ultimate 
redemption of those notes.' As long as the securities 

' This feature of the New York law, which also lies at the basis of the 
National Bank law, is known as the the "safety-fund system." The 
plan of redemption used in Massachusetts is commonly designated as the 
" Suffolk system" from the name of the bank which acted as a general 
redemption agency. 



256 CREDIT. 

thus deposited were worth what they purported to be, the 
ultimate soundness of the notes was secured. 

§ 287. In the years 1863 and 1864, under stress of the 
Civil War, it became desirable to place large government 
loans upon the market. With this end in view, special 
facilities for note issue under national authority were 
offered to banks that would subscribe to United States 
bonds; and in 1865 all note issues under any other 
authority were virtually prohibited by a tax of ten per 
cent on the use of State bank notes. To avoid the 
imposition of this tax upon their note issues, banks 
were compelled to surrender their state charters and ac- 
cept in their place charters under the National Bank Act 
of 1864, Under this Act they were to invest one-third 
of their capital in United States bonds, to be deposited 
in the Treasury, Besides receiving interest on these bonds 
as it became due, they were given the right to issue notes 
to the amount of 90 per cent of the face value of the bonds 
— unless the bonds should depreciate, in which case the 
amount of notes was to be correspondingly reduced. 
Provision was also made for the redemption of national 
bank notes by the agents of the government, in conform- 
ity with the Massachusetts system already described. 

This plan made it certain that the national bank notes 
would be fully as good as the United States bonds on 
which they were based. Inasmuch as these bonds have 
always commanded a premium, there has never been any 
doubt as to the soundness of the currency issued under 
this system. With regard to its volume there have been 
many complaints. For some years the banks were anx- 
ious to increase their circulation, and a limitation on the 
total amount which they were allowed to keep outstand- 
ing was considered a hardship. After 1880, on the other 
hand, the price of the United States bonds became so 
high as to render the maintenance of the circulation un- 
profitable, and a large amount was surrendered, reducing 



A N 'EMER GENC Y RESERVE. 25/ 

the total volume of the bank note issues to a figure less 
than half of that which the law would have allowed.* 

§ 288. It is urged, both against the English and Ameri- 
can systems, that they are based on no philosophical or 
economic principle. Each of them limits the issue of 
bank notes by a somewhat arbitrary line. Instead of 
furnishing an elastic currency that will expand or con- 
tract with the demands of business, they furnish a highly 
inelastic one. In England there is no available means of 
increasing the circulation except by suspending the Act 
of 1844. It has been pointedly said that the English 
Bank Act is of use only when it is rendered inoperative. 
What is done in England by suspension of the Bank 
Act is done in America by the issue of clearing house 
loan certificates ' in virtual disregard of the National 
Banking Law. Each of these things represents a breach 
of the statutory principle, justified only by a public 
emergency. 

§ 289. Yet the necessity of thus suspending limitations 
in an emergency does not prove that the limitations 
themselves are unwise. The most important function of 
bank note issues, in a country which enjoys the benefits- 
of the check and clearing house system, is to provide a re- 
serve for emergencies. If we limit note issues in ordinary 
times we have a reserve power upon which we can fall back 
in extraordinary times. The objection to unlimited bank 
note issues is that they leave us no such reserve to fall back 

' The effect of this reduction was to leave room for other forms of cur- 
rency to take the place of bank note issues thus withdrawn from cir- 
culation. 

^ In times of great stringency the New York Clearing House Association 
has allowed its members to deposit securities with its loan committee and 
receive in return " Clearing House Loan Certificates" for 75 percent, of their 
par value. These certificates are accepted in lieu of cash in payment of 
balances at the Clearing House, and set a corresponding amount of actual 
cash free for general business purposes. In the crisis of 1893 other clearing 
houses resorted to this measure. The whole subject is admirably handled 
by Horace White, Money and Banking, pp. 244-248. 



258 CREDIT. 

upon. If the currency is made thoroughly elastic in years 
of confidence, there is no power of stretching it further in 
days of doubt. If the check system alone has been over- 
strained, a bank that has the power to issue additional 
notes can ease public confidence. But if the public de- 
mand for the use of notes as well as checks has been 
supplied to the utmost, we have no further reserve at our 
disposal. For this reason an unphilosophical limit to note 
issues is far better than no limit at all. People may com- 
plain that the currency does not adapt itself to the need 
of a certain place or a certain time ; but on ordinary 
occasions this defect may be made up by an extension of 
the use of checks. At such times the receiver of a check 
can readily satisfy himself whether the man who makes 
payments in this form is financially solvent or not. If he 
is in danger of failure, there will be special reasons which 
make such danger imminent, and against whose operation 
the commercial community can protect itself. But in 
extraordinary times of stringency, any man is liable to 
fail ; no man can be sure that his checks will be received. 
It is in such emergencies that notes must be substituted 
for checks in order to prevent an unlimited stringency 
and a disastrous panic. On these occasions additional 
issues of bank notes are not merely a public conven- 
ience, but a public necessity. The advantages of 
having such a reserve power at command during one 
month out of every fifty far outweighs the very slight 
disadvantage of being unable to substitute notes for 
checks during the other forty-nine. To prevent the re- 
currence of experiences like those of 1825 in England 
or 1857 '^^ the United States, the important thing is to 
have a limit on note issue, even if it be an arbitrary one, 
and to have it low enough. Whether it should be as 
stringently drawn as in England, where to all intents and 
purposes a bank note is simply a certificate of deposit of 
gold, or whether we should allow the somewhat wider lib- 



GOVERNMENT NOTES. 259 

erty in use in the United States, is open to question. 
Probably it does not make so much difference with busi- 
ness as might appear on the surface. England has fewer 
bank notes, but this does not cause a less proportion of 
her business to be done on credit. Checks are substituted 
for notes, and the proportion of transactions settled by 
handling of actual coin or coin certificates is even smaller 
in England that in the United States. Paradoxical as it 
may appear, the all-important thing is that the bank note 
currency should not meet the wants of business in ordi- 
nary times ; that it should not be sufficiently elastic at 
such times as to be unable to take additional strain in 
times of emergency.^ 

§ 290. If, as experience shows, the right of note issue is 
a dangerous power to place in private hands, some people 
think that the best way to avoid this danger is by having 
the government take that power, instead of trying to re- 
strict somebody else in its exercise. 

Those who urge this view of the matter say that the 
government by making its own note issues would com- 
bine protection to the people with profit to the treasury. 
A bank, by keeping a reserve of thirty per cent of its 
outstanding notes, earns interest on the other seventy 
per cent without furnishing any corresponding amount of 
capital. Why should not the government avail itself of 
this chance of getting something for nothing? A fortiori, 
if the bank has been allowed to secure its note issues by 
the purchase and deposit of government bonds and thus 

^ Political reasons may sometimes make it wise to allow freer issues of bank 
notes than can be defended on strictly economic grounds. The advantages of 
bank issues over government issues are so great that it may become advisable 
to increase the volume of the former as a means of forestalling a demand for 
the latter. In these circumstances there is much to be said in favor of any 
well-considered plan by which the banks can issue, under, public supervision, 
notes based on securities of unquestioned value ; paying a tax on their circu- 
lation sufficient to furnish a fund which will protect the community against 
loss to the note-holders from the mismanagement of any individual bank. 



26o CREDIT. 

earn double interest on the securities and on the notes 
outstanding, why should not the government appropriate 
this profit to itself instead of giving such a premium to 
the banks ? 

§ 291. To these points it may be answered, first, that 
much of the profit to the banks from such transactions is 
apparent rather than real. The best proof of this is 
found in the fact that so many of the national banks of 
the United States have surrendered their circulation, 
finding that they could employ their capital more profit- 
ably in discount and deposit business than in the pur- 
chase of government securities and the issue of notes. 
The expense of the operations connected with the busi- 
ness of note issue is apt to eat up the alleged double 
profits. In the second place, if the government should 
take this business out of the hands of the banks, the 
apparent profit that it would derive from such transac- 
tions would be outweighed by certain indirect losses. 
The existence of a large body of outstanding notes, 
guaranteed by the government and secured only by a 
fractional reserve, involves a loss to the credit of the 
p-overnment and an increase in the rate of interest which 

o 

it must pay on all other parts of its national debt. If 
the government took two hundred million dollars of cir- 
culation out of the hands of the national banks and held 
a reserve of sixty million to protect it, it would earn 
interest at (say) five per cent on one hundred and forty 
million dollars, or seven million a year. If, however, as 
a result of this operation, the rate of interest on the 
national debt in general were one per cent, higher than 
would otherwise be the case (and this is not an improb- 
able supposition), there would be a loss of one per cent 
on a thousand million dollars. This loss of ten million 
would outweigh the gain of seven million connected with 
the assumption of the banking business by the govern- 
ment, and leave a deficit of three million. The exceed- 



DANGERS IN GOVERNMENT NOTES. 26 1 

ingly low rate of interest on the loans to the English 
government is largely connected with the fact that that 
government does not guarantee any paper currency on 
the banking principle, directly or indirectly. England's 
gain from this source almost certainly outweighs any 
loss of possible interest which might be earned by float- 
ing the currency on a fractional reserve. If this is true 
at ordinary times, it is most conspicuously true in emer- 
gencies. When the revenues of the government are 
deficient in amount, the existence of a circulation guar- 
anteed by the treasury and protected only by a frac- 
tional reserve constitutes a public danger. This is the 
time when people will want coin instead of notes, and it 
is just the time when the government cannot give them 
the coin in exchange for the notes without resorting to 
a loan on more or less unfavorable terms. If the gov- 
ernment finds itself face to face with a war instead of a 
commercial crisis, these difificulties are multiplied. Every 
dollar of notes over and above the stock of coin or bullion 
available for their redemption is under such circumstances 
a source of weakness to the government when it most 
needs strengthening. If it has an accumulated supply of 
cash assets, it can tide over the initial stages of the war, 
until advantageous arrangements have been made for 
placing loans and obtaining other means of meeting the 
extraordinary expenses. But if instead of such a reserve 
there is an absolute deficiency and an excess of liabilities 
over assets, the finances are embarrassed from the very 
outset, and the war burdens indefinitely increased. 

§ 292. Side by side with the fiscal reasons why the 
government should not attempt to carry on the work 
of bank note issue for itself, there are equally important 
commercial ones. The treasury department is not well 
situated for doing a banking business. It has no means 
of getting currency into circulation Avhere it is wanted, or 
of retiring it when it is no longer wanted. A bank every 



262 CREDIT. 

day handles commercial bills and other evidences of the 
need of money. Its assets are of such a kind that they 
can be used either for putting currency into circulation or 
withdrawing it from circulation. The assets of the gov- 
ernment are of a totally different character. They furnish 
no indication of the volume of currency needed. If the 
government attempts to issue notes on the basis of its own 
property or the property of the country, quick inflation 
is the result. The limit of power of the treasury to 
maintain specie payment for such notes is soon reached. 
When the government comes to that limit, the tempta- 
tion to suspend specie payments and declare the notes 
legal tender is enormous. If this is once done there is 
no limit to the issue of more notes,. but a very speedy 
restriction of their commercial utility. The assignats of 
the French revolutionary government were avowedly 
secured by the value of confiscated lands which it held. 
But this set no limit to their inflation. To avoid over- 
issues of notes, they must be based, not on some form of 
property whose value is measured in money, but on some- 
thing which can be used as money itself and which will 
at once be taken out of the hands of the government 
when people begin to distrust the value of government 
promises. 

§ 293. Proposals are occasionally made that the United 
States government should issue notes on the basis of pro- 
ducts entrusted to its hands ; the notes to be retired as 
soon as the products are withdrawn, and the proportion 
of such notes to the value of the product deposited to be 
kept low enough to ensure the government against loss 
and stimulate the owner to dispose of his goods as soon 
as he conveniently can. The Farmers' Alliance lays great 
stress on a project of this kind. Such a plan, if carefully 
carried out, would do very little good or harm. But the 
chance of its being carefully carried out is not one in a 
thousand. The motive which lies back of its advocacy is 



FALSE EXPECTATIONS OF HELP. 263 

the desire to raise prices, coupled with the belief that 
prices are being unduly depressed by combinations of 
capitalists who hold money back. It is not the tem- 
porary difificulty of getting money, but the permanent 
difficulty of getting more money than consumers are 
willing to pay, which constitutes the chief cause of 
demand for government intervention. If safe action on 
the part of the government does not make the currency 
larger than it is with safe action on the part of the banks, 
the whole reason for the scheme will fall to the ground. 
In itself, it would be neither good nor bad. But it 
would involve the existence of a system of governmental 
machinery which with slight changes in the law could be 
made to inflate the currency under the guise of pro- 
moting credit ; and this would be a perpetual menace 
to the commercial stability of a country which adopted it. 



CHAPTER IX. 

PROFITS. 

Competition among Investors — The Rate of Interest — Causes of Variation 
— Economic Rent — Net Profits and Losses — Commercial Crises. 

E. V. Boehm-Bawerk : " Capital and Interest," " The Positive Theory of 
Capital." (Innsbruck, 1884, 1889.) Translated by W. Smart. London, 
1890, 1891. 

§ 294. If only one capitalist is engaged in the produc- 
tion of an article, any labor-saving improvement which he 
may apply will give him an obvious advantage. He will 
sell his product at a high rate, and pay for his labor at a 
low rate. The difference between the two, which consti- 
tutes his gross profit, may be very large. 

But the amount of this profit invites other competitors 
to enter the field. They will increase the supply of the 
product, and thereby drive prices down ; they will increase 
the demand for labor, and thus tend to force wages up. 
This process will continue as long as the excess of price 
above wages furnishes a sufificient motive to attract capi- 
tal ; in other words, as long as the market price is above 
the normal price. 

§ 295. Let Oa represent the minimum price' which any 

* This figure differs from those in chapters iii and iv, in having the axes 
reversed, so that horizontal lines represent quantities and vertical lines repre- 
sent prices. This has been done because it is customary in mathematical 
diagrams to represent causes by horizontal lines and effects by vertical ones. 
In chapter iii we treated price variations as the causes and showed their 
effects on quantities produced and consumed. Here we treat the quantities 
produced and consumed as the causes which dstermine the price that can be 
charged. Hence the reversal of axes. 

264 



COMPETITION AMONG SPECULATORS. 



265 



laborer is willing to accept for his services in producing an 
article, and Ob the maximum price which any consumer is 
willing to pay for this article. If only one such thing is pro- 




duced the capitalist will make a very large profit — no less 
than the whole difference between the minimum cost Oa 
and the maximum price Ob. But, with industrial as with 
commercial speculation, the success of one operation paves 
the way for others (§ 115) ; and as these operations become 
more numerous, the margin of profit becomes narrower. 
If aa' represents the supply curve of labor (§ 94), so that 
any desired quantity of labor Oq can only be obtained at a 
price qy, and bb' represents the demand curve for the 
products of this labor, so that the results of Oq can only 
be sold at the price qx^ it is obvious that the margin yx 
becomes narrower as the quantity of production increases. 
When the amount of productive labor reaches Or, the 
selling price of the product only equals the amount of 
wages paid, and there is no possible inducement for capi- 
talists to extend their operations. In fact, they will not 
wish to go as far as this point ; for at Or they simply 
recover what they advance, with no compensation for the 
risks which are always involved. To assume these risks, 
they must have some adequate motive. They will not 
care to employ labor unless they expect it to yield them 
a margin of profit xy after replacing the capital advanced. 
If this margin attracts possessors of capital enough to em- 



266 PROFITS. 

ploy an amount of labor Oq at a price qy, the product will 
be furnished to the consumers at a price qx. The com- 
petition of different sellers will create a market price for 
products which will render it unnecessary for any buyer 
to pay more than qx ; the competition of different em- 
ployers will create, though in less perfect fashion,' a market 
rate of wages, which will render it unnecessary for any 
laborer to accept less than qy. 

Under these circumstances we have 

(i) The area Oqya representing the amount which dif- 
ferent laborers would be prepared to accept. 

(2) The area Oqyw representing the amount which com- 
petition enables them to get. 

(3) The area Oqxb representing the amount which dif- 
ferent consumers would be prepared to pay. 

(4) The area Oqxp which competition allows them to pay. 

The difference pxb between what consumers are pre- 
pared to pay and what they actually do pay may be 
treated without great error as illustrating the consumers' 
gain or surplus from the process of production.'' The dif- 
ference ayw between what laborers are prepared to receive 
and what they actually do receive, may in like manner be 
treated as the laborers' gain' or surplus. The area wxyp 
represents the total profit of the capitalists who have 
brought the operation to a successful conclusion. The 
ratio of xy (profit) to yq (capital advanced) ^ is the per- 
centage of profit on the transaction. If the time which 
elapses between the rendering of labor and the sale of 
the product is one year, this percentage represents the 

^ This incompleteness of competition for labor is due chiefly to the fact 
that different producers apply their labor under very different conditions. 
For purposes of illustration, we have for the moment ignored these dif- 
ferences. 

^ These illustrations find their chief practical use when we study the inci- 
dence of taxation (chapter xiv). 

^ Note that the amount advanced by capitalists as a class is neither more 
nor less than the sum of wage-payments (§ 139). 



DIFFERENT ELEMENTS IN PROFIT. 26"/ 

rate of profit, as it is ordinarily expressed. If the time be 
longer or shorter than one year, the ratio must be corre- 
spondingly reduced or increased to bring it down or up 
to the year's time unit as a basis of measurement. 

§ 296. It rarely happens that the case is so simple as 
this illustration assumes. Different units of product do 
not as a rule involve the same amounts of labor. In some 
cases the amount paid in wages is far less than the selling 
price ; in others, the margin is very narrow. Part of 
these differences may be explained by the difference in 
time which elapses between the application of labor and 
the sale of the product. If one capitalist waits twice as 
long as another and by so doing obtains double the 
amount of profit, the rate of profit of the two men is 
approximately the same. But after making all proper 
allowances for differences in time, there remain other dif- 
ferences, due to superior foresight in investment or skill 
in management, which make the profits on capital, in its 
different applications, take a very wide range. Instead of 
a fixed rate of profit, as the result of competition, we find 
an extremely variable one. 

§ 297. Wherever the system of interest prevails, it is 
customary to explain these differences by analyzing profits 
into several parts, each governed by laws of its own. If 
the prevailing rate of interest on good security in a 
certain market is five per cent, and a concern with an 
invested capital of a hundred thousand dollars shows a 
gross profit of eight thousand dollars in the course of a 
year, we consider five thousand dollars as interest on 
the capital invested, and the other three thousand as sur- 
plus gain. If this surplus is due to excellence of location 
we call it economic rent ; if it is due to superiority of 
management we call it net profit. We thus separate the 
gross profits into three elements : 

(i) A payment for capital 'kno'wn as interest. 

(2) A payment for location known as rent. < 



268 PROFITS. 

(3) A payment for skill known as net profit. 

These distinctions are clear and important ; but there 
has been a tendency among students of economics to 
exaggerate their importance and their clearness. In 
dealing with these various elements of profit we have to 
guard ourselves against several prevalent fallacies with 
regard to interest. 

§ 298. We must note, in the first place, that interest is 
not a " natural " return for capital independent of skill. 
The power of capital to yield interest is dependent upon 
the skill with which it is managed. A borrower offers 
interest because he thinks that he has the ability to earn 
it. The rate which capital commands will depend pri- 
marily upon the borrotucrs estimates of their skill in this 
respect, rather than upon any natural or inherent quali- 
ties in the capital itself. Of course there is a certain con- 
formity between the borrowers' estimates for the future 
and the actual experience of the past ; but this is by no 
means so close as some writers seem to assume. 

§ 299. In the next place, we must beware of confound- 
ing the causes which have established the system of inter- 
est with those that determine the rate of interest. It is 
partly with the object of avoiding this confusion that the 
writer has chosen to explain the development of the sys- 
tem in one chapter (§§ 132-157) and to discuss the deter- 
mination of the rate in another. The S5^stem of interest 
was approved by jurists, because the accumulation and use 
of capital was advantageous to society as a whole, and in- 
creased the public wealth (§ 3). With this end in view, 
society was willing to offer rewards to those who would ab- 
stain from destro3'ing wealth and would use it productively. 
But it is an unwarranted statement that the amount of the 
reward corresponds or ought to correspond to the sacrifice 
involved in the abstinence or to the increased utility of the 
product. The idea that the increase oi public wealth will 
enable anybody to pay interest is justly characterized by 



WHO FAYS INTEREST. 269 

Boehm-Bawerk as a " naive " theory. This naive theory- 
furnishes us a true explanation of the cause of the system 
of interest ; but it does not touch the questions involved 
in the determination of the rate. Society is anxious to 
have a great deal of capital invested for the sake of the 
resulting gain to the public wealth. It does not under- 
take to pay a corresponding price, or in fact any specified 
price whatever, for the capital used for this purpose. It 
leaves to the skill of the investors the problem of deter- 
mining what rate they shall pay for the use of one 
another's capital. 

§ 3(X). For we must constantly note that interest is not 
paid by society to the capitalists, but by one group of capi- 
talists to another. It is not paid for capital, but for the 
control of capital. The rate depends upon the relative 
number of capitalists who desire such control and of those 
who are willing to part with it for a fixed consideration 
guaranteed by some other capitalist. 

In any large industrial enterprise there are usually two 
classes of investors, represented by the stockholders and 
bondholders of a railroad. The former class is willing to 
take large risks for the chance of contingent profits. The 
latter class wants security of return and is quite willing 
to abandon possible chances of large gain. The modern 
system of interest is nothing more than the recognition of 
these two classes of investors and their mutual relations ; 
the rate of interest is the outcome of a bargain between 
them. Interest results from a contract between two capi- 
talists uniting in a common enterprise. It is a sum paid 
by one investor to another investor — out of capital, if 
necessity shall require. If the borrower has not capital 
enough to cover such contingent necessity, what is called 
interest really is compensation for risk, and is apt to be 
made far too small in comparison with the chances of 
loss on the principal. 

Interest, from the standpoint of the borrower, is the 



270 PROFITS. 

price paid for the control of industry. Capital gives its 
possessors the right to direct the productive forces of 
society if they will take the speculative risks connected 
with the uncertainty as to the value of the product. When 
some of those who unite in an investment are anxious to 
do this and others are not, the former stand ready to offer 
the latter a price for such rights of control. Interest from 
the standpoint of the lender is the price for which he is 
ready to forego the chances of control which, under the 
present social system, the ownership of unconsumed 
wealth gives him. It represents commuted profits. 

§ 301. The rate of interest, in its industrial aspect, is 
neither more nor less than a competitive rate of commuta- 
tion. It is fixed like any other competitive price, by the 
self-interest of individuals, in such a way that the demand 
for loans becomes equal to the supply. 

Nearl}^ all loans are made with the immediate or ulti- 
mate purpose of investing the borrowed capital in such a 
way as to enable the borrower to secure a profit — as in 
undertaking a business enterprise — or to avoid an expense 
— as in becoming the owner of a home which will save 
the necessity of paying rent.^ The demand for produc- 

' There are three other less important sources of demand for loans which 
require mention at this point : 

(i) A few people desire loans for the pleasure of consumption rather than 
for their utility in production. They will borrow money to-day which it 
may be ten times harder to repay to-morrow, because abstinence to-day 
seems to their imprudent minds a far more serious matter than abstinence to- 
morrow. The demand for accommodation of tliis kind is so unintelligent 
that its amount is but slightly affected by the rate charged. 

(2) A somewhat larger number of people desire loans as a means of meet- 
ing contracts which they have previously made, and which they cannot 
otherwise fulfil without selling some of their property at a sacrifice. These 
loans are sought for the purpose of avoiding a loss rather than of making a 
profit — if the two things can be said to be distinguishable. They have 
special importance in times of monetary stringency. The demand for such 
loans is more affected by changes in the rate of interest than that for con- 
sumption loans, but less so than that for industrial loans. 

(3) Nations make loans for war purposes, in order to maintain an army at 
the expense of future taxpayers instead of present ones (chapter xiv.) 



THE DEMAND FOR LOANS. 2/1 

tive loans of this kind depends almost entirely upon 
the rate charged. If a man has intimate knowledge of 
the details of a business, he knows when to borrow and 
when to contract his borrowings. His demand for loans 
arises from the fact that he expects a profit from the con- 
trol of the capital. As long as this expected profit is 
greater than the prevailing rate of interest, he will be a 
borrower rather than a lender. If he thinks that the 
profit from an enterprise will be seven per cent, and he 
can borrow additional capital at five per cent, he will be 
glad to do so. Of course he knows that he may fail to 
make more than four per cent, in which case his borrow- 
ing will prove to have involved a loss ; but he also knows 
that there is a chance of -making ten per cent, in which 
case there is an exceptional gain. If he has confidence 
in his estimate of seven per cent as the probable rate of 
profit on a series of transactions, he will not hesitate to 
borrow at five per cent, or even at six ; believing that the 
losses on some transactions will be more than balanced 
by the extra gains in others. 

As the rate of interest becomes higher the number of 
men who are ready to borrow grows less. If in the case 
just assumed the rate of interest had been seven per 
cent instead of five, the man who expected the profit 
to be seven per cent would have no inducement to 
borrow ; and if the rate rose to eight per cent he would 
become a lender instead of a borrower. He would find it 
to his advantage to commute his profits, instead of taking 
his chances ; to accept guarantees instead of giving them. 
A considerable part of the supply of loanable capital 
comes from business men who are so conservative in their 
estimates of probable profit that they content themselves 
with the certainty of a moderate rate which their more 
sanguine competitors deem inadequate. We may say, in 
a rough way, that the rate of interest in any business 
tends to a point where the demand for capital on the part 
of those who think their profit will exceed that rate 



2/2 PROFITS. 

equals the supply furnished by those who think that it 
will not.* 

§ 302. In point of fact, the rate is a little lower than 
this. The borrower has a certain amount of trouble in 
the management of capital, from which the lender is at 
least partly free ; and this freedom from trouble makes 
the lender willing to commute at a slightly lower rate 
than he would otherwise accept, and enables the borrower 
to get the benefit of this margin. Moreover there is a 
large class of lenders to whom a sure return is a matter 
of positive advantage independent of the rate charged. 
There are a great many people to whom the certainty of 
five per cent is worth more than an uncertain profit which 
will probably be higher but which may turn out to be 
much lower. The positive value of this insurance is such 
as to make the supply of capital equal the demand at a 
rate lower than would otherwise be fair or probable. For 
the offer of a fixed interest rate attracts capital from 
many investors with whom insurance is a dominant motive 
instead of an incidental one. These people do not ask 
what is the average probable profit in any line, but what 
they can be sure of getting on their loans. They are not 
prepared to make active investments in industrial enter- 
prises if they can possibly help it. They simply stand 
ready to put their capital at the disposal of the borrower 
who. will offer them the best terms consistent with full 
security. Banks, and particularly savings banks, belong 
to this class ; so in great measure do life insurance com- 
panies ; and so do most of the people who have retired 
from active business and are living on money which they 
•have saved. 

^ Some of the receivers of interest, where the contract is what it pretends 
to be, obtain a surplus from the transaction analogous to that of the con- 
sumers or laborers (§ 295). They would be willing to lend capital at much 
lower rates than they actually receive ; but the large demands of the loan 
market, and the unwillingness of other possessors of capital to lend it at 
low rates, enable them to get a larger return than they would otherwise exact. 



THE SUPPLY OF LOANS. 2/3 

§ 303. We thus have two distinct sources of supply of 
loanable capital. A part comes from business men who 
might be borrowers instead of lenders, and who take the 
latter position only when the interest rate seems too high 
in proportion to the risk. The amount of capital available 
from this source is directly dependent on the price offered. 
Another part comes from people who could not take an 
active share in the management of industry ; people who 
lend money as a means of insuring themselves an income 
and who accept the best terms which they can get. The 
amount of such capital does not vary with the rate offered 
— at least not to anything like the degree which is often 
assumed. Observation does not show that a high rate of 
interest has very much effect on saving. Some of the 
motives to save are even stronger when the rate is low 
than when it is high. If a man wishes to provide himself 
with an income of $l,000 per year for his own support 
and that of his family when he becomes unable to work,, 
it is enough for him to save $20,000 if he can get five per 
cent interest ; but if he can only get four per cent he 
must save $25,000 in order to secure the required result.. 
It may safely be said of the general fund of savings, that 
the rate of interest adjusts itself to the amount, rather 
than the amount to the rate. 

§ 304. The thing which is offered by the borrowers in 
exchange for loanable capital, and which equalizes the 
supply and demand of such capital, is a rate of income 
(§ 5). The interest transaction is an exchange of in- 
come for capital. The rate of interest is the amount of 
income per year which the owner of capital deems an 
adequate consideration to induce him to part with the 
capital. Wealth measured in one way is exchanged for 
wealth measured in another. If interest stands at five 
per cent it means that in the judgment of the mercan- 
tile community, five dollars a year is worth a hundred 
dollars out and out. This judgment or market valuation 



274 PROFITS. 

implies that the amounts of capital which people are will- 
ing to convert into income at that rate correspond to the 
amounts of income which people are willing to convert 
into capital/ If the rate of interest is less than five per 
cent, there will be more people who offer income for 
the sake of capJtal, i. e., in common parlance, more bor- 
rowers than lenders. If the rate is more than five per 
cent there will be an excess of people who offer capital 
for the sake of income, i. e., more lenders than borrowers. 
§ 305. The general fund of loanable capital owned by 
people who desire neither risk nor control tends to 
equalize interest rates in different lines. There are a 
number of people who invest part of their money in 
railroad bonds, and part in real estate mortgages. If 
railroad interest rates fall, while farm rates remain un- 

^ The valuation which constitutes the basis of the interest rate may be ex- 
pressed either in the form of a relation between capital and income, as in 
the text, or in the form of a relation between present and future goods, as is 
done by Boehm-Bawerk. It makes little difference whether we say that one 
hundred dollars of capital commands an income of five dollars a year, or that 
one hundred and five dollars due a year hence is worth one hundred dollars 
to-day. The former statement regards the transaction as an investment, the 
latter as a discount. The distinction between them is one of form, not of 
substance. 

There is a different view of the cause of interest which is held by so many 
able writers of the Austrian school (Menger, Wieser, Clark), that it demands 
careful notice. According to this view, the price paid fej; an article, which 
represents its marginal utility to the consumer, is distributed among 
laborers and capitalists on the basis of the marginal utility of the labor and 
capital which have contributed to its production. If the utility of capital, 
ss represented by its efficiency in producing the article, is higher than the 
interest charged for its use, more capital will be employed, and longer time 
allowed to elapse between the rendering of labor and the realization of the 
product. If the utility of labor in producing additional supplies of the 
article is greater than the wages charged, additional labor will be em- 
ployed. These writers conceive of capital and labor as administered in 
successive doses. As the amount increases, the marginal utility of the doses 
will diminish. Competition will compel all capitalists to accept rates of 
interest, and all laborers to accept rates of wages, based upon the produc- 
tivity of the last dose, which gives an "imputed" value to the whole 



ADJUSTMENT OF INTEREST RA TES. 2/5 

changed, some of these people will direct their new 
investments to farms instead of railroads ; increasing the 
supply of farm loans and diminishing that of railroad 
loans. If this process were completely carried out, we 
should have an equalization of the rates of interest in 
different lines, and the establishment of one general rate 
of interest for capital as a whole. 

§ 306. This equalizing process is never fully accom- 
plished, partly for lack of time, but chiefly for lack of 
knowledge on the part of investors. It takes months, 
and generally years, for property owners as a body to 
find out where profits really are highest and transfer 
their investments of capital in amounts sufificient to reduce 
the rate of profit in those lines to the general level. 
When the public has found out where the opportunity 

supply both of capital and of labor. This process adjusts the demand and 
price of labor and capital in such a way that the marginal utility of a dollar 
spent for waiting (interest) is equal to the marginal utility of a dollar spent 
for labor (wages). 

The obvious difficulty in this theory lies in the fact that these adjustments 
are apt to be disturbed by the mistakes of speculators (§ 324, nofe). But 
there is a more fundamental objection to the whole analysis from the fact 
that it involves reasoning in a circle. If at the beginning of a productive 
process we decide upon using an increment of capital instead of an incre- 
ment of labor, it necessarily means that we wait longer for our product. 
We cannot therefore tell when the marginal productivity of labor and capital 
is equal unless we know the relative value of products at two different 
periods J i. e., the rate of interest. If we do not stand at the beginning of a 
period of production, but decide to avail ourselves of the results of past labor 
instead of the services of present labor — which is the case contemplated in the 
more popular expositions of the theory of imputation — we do not touch the 
question of interest at all. We pay a price for the results of past labor 
directly to the owners of the property, instead of giving money to our 
laborers to buy those results for themselves. A manufacturer uses his capi- 
tal to buy coal, which represents the results of past labor ; he pays wages 
which enable his employees to buy flour which also represents the results of 
past labor. There is no more waiting in the ojae case than in the other. 

It may be added that if we look at the matter from any but the narrowest 
point of view, all "doses" of capital are administered in the form of 
wages. 



2/6 PROFITS. 

for large rates of interest has really lain, the conditions 
of business which gave that opportunity have generally 
passed away. Instead of bringing down an unduly high 
rate of interest, the luckless investors will find themselves 
competing in an over-filled industry, where the chance 
of profit hardly covers the risk to any of the parties 
concerned. 

Even without such over-competition, the uninstructed 
capitalists who seek high rates of interest are apt to go 
into the wrong places. They go where interest is appar- 
ently highest, rather than where it is really highest. 
They do not distinguish between high rates which offer 
real chances of profit on good security, and those which 
conceal a large danger of loss. Nor is this at all surpris- 
ing. In every commercial and industrial loan the element 
of risk is present to a greater or less degree. It requires 
special knowledge of the conditions of any particular 
business to know whether that business gives special 
safety or special hazard. Where the rate of interest on 
what appears to be good security is a little higher than 
that which prevails in other lines or other localities, we gen- 
erally find that there are some hidden chances of loss which 
account for the difference. It is these chances of loss 
which prevent the capitalists who have direct knowledge 
of the business from extending their investments on terms 
which are apparently so favorable. If, under these con- 
ditions, the uninstructed capitalist, who has not this 
special knowledge, rushes in to take advantage of the 
high rate, he is apt to lose a considerable proportion of 
the principal which he has risked. Any movement of 
capital to these lines results in lowering the rate of in- 
terest where the margin of risk is high, and where the 
true interest or guaranteed profit, over and above such 
special risks, was perhaps unduly low from the beginning. 

If a man possesses unusual sources of knowledge, he 
can with a fair degree of safety undertake to secure rates 



MONEY SUPPLY AND INTEREST. 2// 

of interest higher than those quoted in the open market. 
But in the absence of such special knowledge the chances 
are that the equalizing process will work in the wrong 
directions instead of in the right ones, and that the in- 
vestor who tries to get the benefit of large returns of 
interest will find this benefit more than counterbalanced 
by losses on his principal. 

§ 307. Making proper allowance for the slowness or 
imperfection of these adjustments, we may fairly say that 
there is a general rate of interest at which the demand 
for capital equals the supply. 

This general rate of interest may be influenced in three 
ways : by changes in the supply of money, in the supply 
of products, and in the degree of commercial security. 
The effects of the two first are trifling in importance as 
compared with the last. 

§ 308, We have already seen (§253) the fatuity of most of 
the attempts to lower the rate of interest by increasing the 
supply of money. Changes in the volume of the currency 
are quickly followed by corresponding changes in price. 
The man who desires to use a certain amount of food or 
machinery and to control a certain amount of labor must 
borrow a proportionally larger sum of money in order to 
get the products and services required. The demand for 
capital increases side by side with the supply ; and the 
uncertainty which loose currency legislation creates with 
regard to the future, actually tends to force the rate of 
interest upward. 

The one exception to this rule which is important 
enough to deserve notice arises when issues of money are 
made in such a form as to relieve a temporary stringency 
in the money market. In such a case the public is seek- 
ing for means of payment rather than for means of in- 
vestment, and an unexpected supply of such means of 
payment may break what is virtually a corner (§ 175) in 
the stock of available money. But even in this case it is 



278 PROFITS. 

necessary that the inflated supply of money be quickly 
retired, in order to prevent the subsequent rise in interest 
due to the speculation and insecurity which such excess 
of currency engenders. 

§ 309. The idea that the rate of interest can be lowered 
by increasing the supply of products involves less practi- 
cal danger, because it is very hard for any mischief-maker 
to put it into effect ; but as a theoretical fallacy it is even 
more subtle and dangerous than the one just exposed. 
When the student of economics has mastered the idea 
that interest is paid for capital and not for money, he 
infers that an increase in the supply of capital will result 
in diminishing the rate paid for the use of such capital. 
So it undoubtedly Avill. If there are twice as many 
machines in existence, the rental value of each machine 
will fall. But the rate of interest will not necessarily be 
affected thereby. The price of each machine will fall 
nearly as fast, and may fall quite as fast, as its rental 
value. Interest on a machine is expressed by the ratio 
between the rental and the price. The rate of interest 
will therefore suffer little or no change from an increased 
supply of machinery. A large part of the causes which 
are used to explain when interest will be low really show 
when machinery will be cheap, and nothing more. 

§ 310. The case is a little less clear when we come to in- 
vestigate the effect of an increased supply of food instead 
of an increased supply of machines. An increase of food 
enables the community to wait a longer time for the vari- 
ous products of its labor, and to get the benefit of improve- 
ments which involve this long period of waiting. It is 
argued by some writers that a fall in the rate of interest 
necessarily follows such a lengthening of time in produc- 
tion. But it is doubtful whether this result takes place 
in practice. An increase in food supply is so apt to lead 
to increased consumption on the part of the laborers that 
the surplus will be utilized in a far different way from that 



FOOD SUPPLY AND INTEREST. 279 

contemplated by this theory — not by a lengthening of 
production time, but by a shortening of consumption time. 
Under these circumstances it seems a mistake to deduce 
what the rate of interest will be if the habits of the 
laboring class remain unchanged, when in fact the habits 
of the laboring classes adjust themselves to the increased* 
supply of products faster than the rate of interest does.' 

The chief practical effect of abundance of capital upon 
the rate of interest is a psychological one. If goods are 
scarce in proportion to people's bodily necessities, the 
public often sets a high value on present consumption 
and makes relatively little account of the future. An 
increasing abundance of consumable products, by dimin- 
ishing the pressure of immediate necessity, gives larger 
room for intelligent classification of risks and for accept- 
ing future enjoyments instead of present ones, on terms 
more nearly commensurate to the actual risk which arises 
from deferring the enjoyment in question. 

§311. The prevailing rate of interest is far more affected 
by the degree of security than by the volume of money or 
of products. While people may not always judge accu- 
rately of the security' in any particular case, there is no 
doubt that interest in general is low where property is 
safe and high where property is uncertain, apart fronl the 
conditions which prevail in any particular business. This 

' A scarcity of food lessens the profitable use of machinery, but not 
through the agency of the rate of interest. If there is only food enough to 
last a year, and a capitalist diverts laborers from the production of food and 
other articles of immediate use to employments whose return is more remote, 
he finds at the end of a year that the supply of food and other consumable 
products is scanty. The men who have produced food find their private 
income increased by this scarcity ; those who have invested capital in 
machines find their possible profits diminished because of the increased 
expense of maintenance of themselves and their laborers during the period 
of waiting. 

Scarcity of food and high rates of interest both have the same effect in. 
restricting the use of machinery ; but this does not prove that scarcity of 
food in itself causes a high rate of interest. 



28o PROFITS, 

is partly because personal security promotes accumulation 
of products (chapter ii), but chiefly because an assured 
future enjoyment is far more valuable than a doubtful 
one. 

The best guarantee of security is given by the personal 
character of the capitalists in a nation ; but the clearest 
evidence of such security is generally to be found in con- 
servative government. If law is so administered as to 
make property rights precarious, the value of a future 
return will necessarily be low. If it is so administered as 
to make them stable, the value of future goods will more 
nearly correspond to that of present ones. In the former 
case the rate of interest will be high ; in the latter case it 
will be low.^ 

§ 312. It must not be supposed that a low rate of in- 

^ Security affects the rate of interest in two ways, which must be carefully 
distinguished from one another. 

The conscious attempt to provide against particular risks causes differences 
in the nominal rate of interest. In uncivilized countries a large part of the 
interest payments are of this kind. The bottomry loan in old times often 
called for twenty per cent interest because of the chance that the ships 
which furnished the security would be wrecked. But as civilization ad- 
vances these risks come to be separated in the mind of the investors from a 
residual sum which they can obtain on what they consider absolutely good 
security. This rate is not looked at by the individual as a payment for 
risk. Yet its height is probably in large measure a result of past experience 
as to losses ; and this experience is a most potent factor in determin- 
ing the relative value which people place upon present and future goods 
even when they suppose those future goods to be certain. If investors have 
been free from unforeseen losses in the immediate past, there is at once a 
greater quantity of old capital in the hands of people who are ready to offer 
its control to others, and a greater habitual readiness to accept promises of 
moderate income rates as an adequate consideration for such control. If on 
the other hand people have suffered considerable losses of property which 
they have entrusted to others, there is at once a smaller supply of capital in 
the hands of people who are ready to part with its control, and a hesitation 
to accept promises of moderate income as an adequate consideration for 
such control, even when there appears to be no tangible risk in the particu- 
lar case involved. Thus the relative valuation placed upon present capital 
and future income is unconsciously influenced by the past experience of the 
community. 



DIFFERENCES IN RISK. 28 1 

terest, due to increased security, represents an unmixed 
good for society. Risk is an incident of progress. As 
long as the human mind is not endowed with prophetic 
foresight, great security may be obtainable only at the 
price of general stagnation. So far as insecurity results 
from activity in industrial enterprise on the part of the 
capitalists of a nation, rather than from lax enforcement of 
the laws protecting vested rights, it is a good thing. If 
a low rate of interest means that people do not tamper with 
laws it is good ; if it means that they do not experiment 
with business methods it is bad. In the latter case any 
saving which results from a low rate of interest is from the 
public standpoint more than nullified by the failure to 
utilize new processes and new ideas as fast as they are 
developed. 

§313. The tendency of profits and interest to fall as 
a nation advances has been much overestimated. The 
high rate of profit in new countries is apparent rather than 
real. A new country offers more fields of exceptional 
profit than an old one, but it also involves more dangers 
of exceptional losses. The statistics of railroads in differ- 
ent parts of the United States, show that the ratio of in- 
come to the total capital invested is much higher in the 
older parts of the country, and lower in those which 
are more newly settled. Part of this difference is doubt- 
less due to the fictitious capitalization of railroads in the 
West, where the real percentage of profit to capital inves- 
ted is greater than the apparent percentage. Yet after 
making all due allowance under this head there remains a 
balance in favor of investments in the East. This balance 
of profit is made yet more conspicuous if we take into 
account the generally appreciating value of railroad secu- 
rities in New England or the Middle States, and contrast 
it with the great depreciation which has affected so many 
companies in the South and West. If, instead of confin- 
ing our investigation to one country, we compare the rail- 



282 PROFITS. 

roads of Europe with those of the United States, we shall 
find that the European lines, which at first promised less 
apparent profit, have on the average proved more remun- 
erative to the investors than have those of the United 
States. 

The popular misunderstanding about profits in new 
countries is due to two causes. In the first place, the 
expectation of profit on the part of men who venture 
their capital in a new country is generally exaggerated. 
Public opinion is influenced by the glowing reports of 
profits that are going to be realized, and does not stop to 
inquire how far these expectations are warranted by actual 
facts. In the second place, the public sees the instances 
of exceptional profit, which stand out clearly because of 
their success, and does not see those failures which have 
sunk out of sight because they were unsuccessful. 

§ 314. While profits do not perhaps decline as a nation 
advances, but simply become surer and less speculative, 
the rate of interest undoubtedly tends to fall; but this fall 
is not so marked as most people suppose. Many cases 
of high nominal interest in a new country res^ilt from con- 
tracts that are more or less fraudulent in their character. 
In an undeveloped region there are always a number of 
speculators who borrow money without giving adequate 
security, obtaining such money by the promise of a. rate 
of interest which leads investors to close their eyes to the 
defective character of the security offered. It is common 
to speak of the high rates of interest received in such 
cases as constituting insurance against risk. But the 
amounts thus received in the form of interest represent so 
small a fraction of the losses on the principal that the term 
insurance is an arrant misnomer. Such contracts never- 
theless give rise to an impression that the actual market 
rate on good security is higher than is really the case. 

At a time when interest rates in one of our leading 
northwestern states were quoted in the eastern market at 



NEW AND OLD COMMUNITIES. 283 

seven per cent on first-class security, the writer took pains 
to inquire of conservative local bankers what were the 
actual rates which persons in that section who had money 
to lend felt that they could command. He found that 
such loans ran at six per cent and less. The differ- 
ence of one per cent was offered the eastern investor as 
an insurance against risk. How miserably inadequate it 
was for the purpose was seen in the collapse two or 
three years later of the security for a large number of 
these seven per cent loans. 

§315. After making proper allowance for these causes 
which affect the apparent or nominal rate of interest in a 
new country, there still remains a slight difference in the 
real rate. This may be explained as follows : 

1. In most new communities there is an insecurity of 
tenure and a chance for adverse legislation regulating 
conditions of payment, which make future rights less 
valuable than they are, in more conservative countries, 
where the probability of change is less. 

2. The high rate of apparent or false interest just de- 
scribed attracts into illegitimate investments a certain part 
of the supply of the capital which would otherwise be 
used in legitimate ones and prevents the rate of true 
interest from being lowered to the point which it should 
normally reach. The point of equilibrium of the supply 
and demand of capital is forced upward by the action of 
speculators who are not really in a position to offer inter- 
est, but who are enabled by the blindness of certain 
sections of the investing public to compete in the market 
for industrial loans. 

3. In a new country a larger proportion of people are 
anxious to manage their own business, instead of leaving 
it to others. If a given amount of capital is in the field 
seeking profits, the height of the interest rate will depend 
upon the relative numbers of those who desire control and 
of those who are willing to abandon such control for the 



284 PROFITS. 

sake of a fixed return. Where nearly everybody wishes 
to conduct his own business, the interest rate will almost 
necessarily be higher than where most people are willing 
to leave the conduct of business in the hands of others. 
In the early history of New England, rates of interest 
were higher than they are now, not because property was 
less secure nor because capital was scarce, but because 
almost every man stood ready to manage his own capital, 
and required considerable inducements in order to be will- 
ing to entrust it to others. 

§ 316. The process which tends to equalize the rates of 
interest in different lines, operates also, but in a less 
degree, to equalize the rates of profit. 

If interest goes down while profit remains station- 
ary, there is a margin of advantage to the borrowers, 
which makes each of them anxious to use more capital in 
his business. So far as they do this, they will increase the 
supply of products, which necessarily puts prices down, 
and will increase the demand for labor, which tends to 
force wages up. This process will go on until the rate of 
profit adjusts itself to the rate of interest ; that is, until 
the difference between the two is only sufficient to pay 
the employer a fair compensation for his time and trouble 
— such as he could earn if working for another instead of 
for himself. 

§ 317. But there are certain causes which make this 
adjustment very incomplete. They have already been 
mentioned in some detail in connection with normal price 
(§ lOi.) Looking at the matter from the standpoint of 
the producer instead of the consumer, we may divide 
them into two groups : 

1. Where all the business men in an industry combine 
to prevent the increase of investment and production. 

2. Where they act independently and compete with one 
another, but where some have advantages, either of method 
or location, which others do not possess. 



DIFFERENTIAL GAINS. 285 

Both of these are commonly called cases of monopoly ; 
but the term applies much more properly to the first 
class than to the second. The superiority which one 
man has over his competitor when the two are actually 
engaged in bidding against one another for the public 
favor may better be called a differential advantage than a 
monopoly. 

§ 318. The exceptional profits of a true monopoly are 
generally transient in their character. If they are due to 
a patent, which is the commonest case, they end with the 
expiration of the patent right ; frequently even earlier 
than this, on account of the invention of a rival process. 
If they are due to closeness of organization or any of the 
other causes described at length in chapter vi, they may 
last longer ; yet even in these cases they are apt to be re- 
duced either by legislation, by fear of new competition, or 
even by the pressure of public opinion. The number of 
monopolies which might have made exorbitant profits for 
a term of years looks very large ; the number that have 
actually done so is surprisingly small. 

§319. Differential gains are quite another matter. They 
generally result from causes precisely opposite to those 
which produce true monopolies. A true monopoly tends 
to arise when a large concern can increase its output with- 
out corresponding increase in expense, so that it can sup- 
ply the whole public and drive smaller or weaker concerns 
out of the market. This case is often exemplified when a 
large factory competes with a number of smaller ones. 
But when a large farm competes with a number of smaller 
ones, the case is quite different. The large farmer prob- 
ably has certain advantages due to the scale on which he 
conducts his operations. But the amount of product on 
which he can realize this economy is limited in quantity. 
A double application of labor and capital will not double 
his output. He cannot drive his smaller competitors out 
of business, because the attempt to supply a large part of 



286 PROFITS. 

the market from one farm will result in loss instead of 
gain. Such an industry is said to be subject to the law 
of the diminishing return. The two chief causes of dimin- 
ishing returns are the limited fertility or capacity of land, 
and the limited power of human brains. No land can 
produce unlimited quantities of product; no brain can 
direct unlimited numbers of men. If the demand for the 
products of any industry is too large to be met by a 
single organized source of supply, however great its nat- 
ural advantages, we shall be likely to see a system of 
differential gain*, due to the independent competition of 
men who make goods for the same market at different 
expense. 

§ 320. Where these differential gains are due to personal 
ability, they are almost always transient in their charac- 
ter, and are known as net profits. Where they are due to 
advantages of location, they are apt to be more permanent, 
and are then known as economic rent. We may define rent 
in its technical or economic sense, as ■ajny permanent excess 
of the rate of profit over the rate of interest.' Economic 
rent is chiefly due to foresight in investment ; net profit, to 
skill in management.^ But the work: of separating the 

' Some writers attempt to explain all profits, including interest itself, as 
arising from differential gain. In this view, which has been most ably pre- 
sented by Ricca-Salerno, interest represents an advantage enjoyed by the 
owners of commodities which have become ready at so early a period that 
they can apply labor under more favorable conditions of time than some of 
their competitors can command ; in precisely the same way that rent repre- 
sents a power of applying labor under exceptionally favorable conditions of 
place. If we could ii||pore the functions and rhe mistakes of the speculator 
(§ 324, note) this would apparently be a sound position. But as matters 
stand there is a radical difference between rent, which is a varying actual 
advantage possessed by the owners of real estate, and interest, which repre- 
sents 2i fixed x2Xq of commutation oi possible but uncertain advantage. 

* We can in many cases distinguish profits from rent by finding what the 
plant will sell for. Excess of selling price over cost is capitalized rent. 
Excess of actual return from the property over interest on its price represents 
profit. Thus if $25,000 represents the amount of capital which has been 
used in improving a piece of real estate, $30,000 its price in the market, 



ECONOMIC RENT. 28/ 

two, even in theory, is very difficult, because we can never 
tell which differential advantages are permanent and which 
are transient. 

§ 321. The " economic " or " Ricardian ' " sense of the 
word rent must not be confounded with its ordinary com- 
mercial sense. Commercial rent represents a price paid 
for the use of land and improvements. A large part of it 
is interest rather than rent. If we deduct the interest on 
improvements from the commercial rent, the remainder 
is economic rent. This is sometimes known as ground 
rent ; and, if contracts for the rent of land were renewed 
every year, ground rent and economic rent would be sub- 
stantially the same. But since in practice ground rent is 
habitually fixed for a very long term of years, the actual 
divergence between the ground rent paid and the eco- 
nomic rent computed on a theoretical basis is apt to be 
very large. 

It is in some respects unfortunate that the term " rent " 
should have been chosen to designate these permanent 
differential gains. Investigators are apt to identify them 
much more closely with actual rents than the facts of the 
case warrant. Thus Shearman, in a recent book on 
" Natural Taxation," treats most of the rent of agricultural 
lands in England as if it were "economic " rent; whereas, 
in fact, the amount of capital which the landlords have 
invested in English farms is enormous. If interest on the 
capital thus invested for agricultural improvements had 
been deducted, as it ought to be, the conclusions which 
Shearman draws from his figures would have been entirely 
reversed. 

and $2,000 a year its gross profit to the OMmer, the current rate of interest 
being five per cent, we shall have this $2,000 made up of 
$1,250 economic interest 
250 " rent 

500 " profit. 

^ The theory of differential gain was first clearly formulated by David 
Ricardo in his Principles of Political Ecotiomy and Taxation. 



288 PROFITS. 

§ 322. Economic rent and net profit are like the pro- 
ducers' and consumers' surplus described at the beginning' 
of the chapter in being differential gains — gains which are 
due to a difference between the conditions of the stronger 
and the weaker competitors. They are unlike them, first, 
in being habitually measured in money and therefore 
more observable ; second, in being offset by differential 
losses which, in some instances, more than neutralize the 
gains. The number of investments of fixed capital that 
have more than paid interest is perhaps balanced by the 
number of those that have failed to pay interest. While 
there are many farms that are worth more than the capital 
invested in them, there are also many which are worth less. 
In times of advancing prices the gains are more con- 
spicuous than the losses. In times of commercial depres- 
sion the case is reversed. 

The existence and persistence of this negative rent 
(and of the corresponding losses or negative profits in 
manufacturing industry) go far to furnish the justification 
for the present industrial system. If it were true, as 
George alleges, that rent is simply an unearned increment, 
an appropriation of a part of the public product, then 
there would be neither wisdom nor equity in leaving land 
under private ownership. If it were true, as Marx claims, 
that profits represent a similar unearned increment, the 
same conclusion would follow with regard to capital. But 
in point of fact, both rent and profits are of the nature of 
compensation for risk. The amount received may be 
greater than the amount lost, or it may be less. This will 
depend largely upon the temperament of the capitalists 
as a body. But of the fact of such losses there can be no 
question whatever. 

§ 323. Many of the writers who treat of the relation 
between business risk and business profit make the mis- 
take of assuming that profits are an amount paid to the 
individual capitalist to cover his risk of loss. Far from 



MISTAKES OF SPECULATORS. 289 

it. They are paid to capitalists as a class for protecting 
the public against its risk of loss. They are charges 
which the capitalists make, not for insuring themselves, 
but for insuring society against the losses incident to 
industrial experiment and industrial progress. 

§ 324. The prevailing theory of economic rent ignores 
the extent of these losses. It assumes that future prices 
can be foreseen with a considerable degree of accu- 
racy. It assumes that the marginal laborer and the mar- 
ginal unit of capital do in fact contribute to the product 
an amount equal to the valuation which is placed on their 
services. But this is notoriously untrue. The marginal 
laborer is often employed at a rate of wages which ex- 
ceeds the total amount that the consumer ever pays for 
the product of his labor. The marginal unit of capital 
receives a return in the form of interest which is often 
decidedly in excess of the advantage which the speculator 
derives from its use. If the product of such labor and 
capital were immediately available for consumption such 
mistakes would not be made ; but as matters stand at 
present they are always being made on a small scale, and 
often on a large one. These mistakes are likely to con- 
tinue as long as we have industrial progress; Society at- 
tempts to reduce them to a minimum by a system which 
is intended to place the control of industry in the hands 
of those who have proved their foresight, and to elimi- 
nate those who have made the mistakes. But in spite of 
this process of natural selection, which makes the judg- 
ment of speculators as a class better than that of the 
average man, the number of serious errors is very great 
indeed.^ 

' The various doctrines which base the rates of wages and interest upon 
the actual contributions of marginal laborers and capitalists to the product 
of industry habitually ignore the effect of these mistakes. To justify their 
method of reasoning, the advocates of these doctrines would be compelled 
to prove either (i) that the actual value of the product of labor and capital 
does in fact conform to the expectations of the speculators ; or (2) that an 



290 PROFITS. 

§ 325. Ricardo of course knew about these mistakes; 
but he assumed th^t they could be quickly rectified — that 
no man would stay long in a business which was unprofi- 
table. He thought that if wages in any particular line 
were momentarily raised too high and prices depressed 
too low, a speedy withdrawal of capital would almost cer- 
tainly follow. Two things led him into this mistake. In 
the first place, the industries of Ricardo's time were for the 
most part conducted on a much smaller scale than they are 
to-day. A number of independent producers supplied the 
market. The most that the community had to fear under 
such circumstances was a slight excess or slight deficiency 
of the supply of products ; and as independent producers 
were constantly entering or leaving business such an excess 
speedily cured itself. In the second place, Ricardo was 
a banker and dealt with those forms of capital which 
could be most quickly transferred from less profitable 
to more profitable lines. Although Ricardo combined 
the experience of a landlord with that of a banker his 
theory of rent represents essentially a banker's view of ' 
farming, which, like a farmer's view of banking, takes 
much more account of the profits than of the losses. 

uiider-estimate of the advantage of using a process which promises remote re- 
turns is just as probable as an over-estimate, so that the mistakes of specula- 
tors may be treated as balancing one another ; or (3) that such mistakes as 
are made will serve to teach their lesson in so short a time that no change in 
the habits of society will intervene to prevent them from correcting them- 
selves. 

Of these alternatives (i) is obviously untrue ; (2) is so far dependent upon 
national character that it is inadmissible as a general assumption ; while (3) 
is, to say the least, open to very grave doubts which the exponents of the 
theory of marginal contributions have made no adequate attempt to remove. 
Por instance : if wages in a particular trade are made higher than the actual 
outcome of industrial processes ultimately warrants, the habits of living of 
the laborers may change before the mistake is discovered and render an 
adjustment to the old basis out of the question. The mistakes of speculators 
render the problem a dynamic one (§ 27) so frequently as to justify us in 
challenging the claims of a statical solution to be considered as any solution 
at all. 



LOSSES ON FIXED CAPITAL. 29 1 

He assumes that there may be a permanent profit due to 
monopoly of location, while any permanent loss will be 
avoided by withdrawal of capital. But modern capital is ' 
not ordinarily invested in such forms that it can be readily 
withdrawn or transferred from an unprofitable use. In 
a large and increasing part of our investments capital is 
irrevocably ^/f^'^")^ (§ 141). Labor has been applied in such 
a shape that its ultimate product cannot be obtained for 
a long term of years. If such labor has proved especially 
advantageous to society, land laws and patent laws confer 
special advantages on the investor. But if for any reason 
it has proved unremunerative, withdrawal is impossible 
without great sacrifice. The positive rent which Ricardo 
saw, and the positive profits of which his successors have 
made so much, are counterbalanced by losses both on 
real estate and on personal property which are perhaps 
greater than the aggregate amount of differential gains 
made by the more successful investors. 

§ 326. Several circumstances may give rise to such loss. 
The most important are : i. Technical failure, where an 
investment of capital does not produce the physical result 
that was expected. 2. Industrial progress, where an in- 
vestment of capital works well for a time, but must give 
place to a better one before the accumulated profits have 
paid for its original cost. 3. Over-competition, where a 
useful method is applied by so many independent invest- 
ors as to make the price of its products disproportionately 
low. 4. Contraction of credit, which reduces the general 
level of prices, and thus makes the investment unre- 
munerative to the man who has made it, even though it 
be otherwise perfectly adapted to the needs of society. 

§ 327. Of these causes of loss, technical failure, though 
often the most conspicuous, is probably the least impor- 
tant. The evils resulting from this source are so obvious 
that they serve as a warning for other investors, and to 
make the repetition of the same mistake improbable. 



292 PROFITS. 

§ 328. The losses from industrial progress are less obvi- 
ous but more widespread. The discovery of a new pro- 
cess may render a mass of old investments useless. The 
invention of the power loom represented a great loss to 
the owners of capital invested in hand looms. The inven- 
tion of the railroad quickly rendered canal property unre- 
munerative. Few, even among the more conservative 
investors, make proper allowances for the danger connected 
with the invention of new processes. The owner of a fac- 
tory, in estimating his profits, is often content to deduct 
the depreciation due to the wear and tear of machinery ; 
and if he makes a further deduction as the patent rights 
which have given him an advantage over his competitors 
draw to a close, he deems that he is pursuing a conserva- 
tive policy. A board of railroad directors is satisfied with 
insisting that a certain sum shall be set apart from current 
receipts to keep the track and equipment at a high stand- 
ard of efificiency. But there is a probable source of dan- . 
ger which is not adequately met by depreciation accounts 
in a factory or by maintenance accounts in a railroad. 
Even when these deductions are made on a liberal basis 
they do not provide a reserve fund to insure the investor 
against the chance of total loss in case other competitors 
bring into use new methods. This loss is not of a kind 
which can readily be estimated in accounting or be de- 
ducted from the sum available for dividends, but it repre- 
sents a great reduction in the profits earned by owners of 
fixed capital as a class. 

§ 329. Nor are landowners exempt from these dangers. 
Much of Henry George's reasoning is based upon the 
assumption that land speculators make many profits and 
few losses. He has probably over-estimated the former, 
and has quite certainly under-estimated the latter. The 
amount of capital which has been sunk in developing^ 
real estate that proves unprofitable is something for 
which it is impossible to obtain accurate statistics ; but a 



LOSSES ON REAL ESTATE. 293 

close observation of real estate values will indicate that 
it is very great. The New England farm represents a 
large amount of capital which was rendered unremunera- 
tive by the competition of farms elsewhere.* A change 
in the current of population has often destroyed all profits 
from real estate in which much capital has been irrevo- 
cably fixed. The development of new means of transpor- 
tation by which wheat could be shipped from a distance 
has played havoc with the farm values of England and of 
the American seaboard. It is not true, as Ricardo as- 
sumes, that the normal price of wheat just remunerates 
the last producer, and that any farmer for whom it fails 
to be remunerative can speedily withdraw from the mar- 
ket. In order to compete in the production of wheat 
large investments of capital are necessary. To bring 
producers into the market the price must be high enough 
to cover their expenses, including interest on fixed capi- 
tal, or at least to make investors think that it will do 
so. But when once they have entered into competi- 
tion they cannot withdraw without a very considerable 
loss of fixed capital. If the price per bushel of wheat 
for a group of producers is fifty cents over and above 
interest, or eighty cents including interest, they will 
not go into the business unless they expect to get 
eighty cents ; but once in, they will not go out until the 
price nears fifty cents. This difference between eighty 
cents and fifty cents leaves room for a large margin of 
loss. If the price falls to the lower figure the same differ- 
ences continue to exist which the Ricardian theory re- 
quires ; but they are differences of disadvantage rather 
than differences of advantage. Moreover, as shown by 
Carey, there are changes of method in agriculture as well 

^ The beginnings of this process were clearly noted by Carey, whose ob- 
jections to the Ricardian theory of rent deserve more consideration than 
they have received. Carey's ideas have been farther developed by Patten, in 
his " Premises of Political Economy," Philadelphia, 1886. 



294 PROFITS. 

as in other lines of industry. The first settlers occupy 
the lands which are most accessible and easily brought 
into use. Subsequent settlers take those which require 
more capital for their development, and as transportation 
becomes cheaper choose lands which are more remote but 
also more fertile. The large production of these new 
competitors often forces down the price of products below 
the amount which it costs to obtain them on the older 
farms, and renders the capital invested in these farms 
unprofitable to its owners. 

§ 330. Even if a process continues to be successful for 
a long term of years, each capitalist is constantly in dan- 
ger from over-competition on the part of other capitalists. 
It is impossible for different investors to know accurately 
what other investors are doing. If prices are high in a 
particular line of industry a number of capitalists will 
simultaneously arrange to take advantage of those prices 
and to secure a share of the exceptional profits which 
have prevailed. When a great many people try to do 
this prices will fall and all investments in that line, old 
as well as new, may be rendered unprofitable. This state 
of things is known as over-production. The use of the 
' term over-production does not mean that more goods 
~! are produced than the community can consume, but more 
\ than the community can pay for at prices which cover 
I the expense to the producers. The larger the fixed 
capital involved in an industry, the greater is the danger 
of such over-production. We see this danger illustrated in 
the history of iron and steel, of shipping, of railroads, and 
in most of the distinctively modern forms of manufac- 
turing enterprise. We find alternations between periods 
of inadequate supply, where products are scarce and 
profits large, and periods of over-supply, where products 
are so abundant as to be sold at a sacrifice, and profits are 
not only destroyed but converted into losses. The fac- 
tory and the railroad put their goods or services on the 



VER-PROD UCTION. 295 

market at prices which fail to pay interest or even main- 
tenance. The owners have invested their capital in a 
form which they cannot readily change. If they abandon 
the field to other competitors it may prove a total loss. 
It is better to lose a dollar on every ton of traffic shipped 
than to lose two dollars on every ton of traffic sacrificed. 
The only limit to this process of cut-throat competition is 
found either in the absolute exhaustion of some of the 
competitors, or in the growth of population to a point 
where the demand at remunerative prices is equal to the 
normal productive capacity of the whole body of com- 
peting investments. 

§ 331. Over-production is liable to take place in any line 
of industry involving large fixed capital. Occasionally 
it will occur in one line only, without involving oth- 
ers ; in which case it is more properly discribed as dis- 
proportionate production. The depression in American 
railroads in 1888, while other lines of industry were gen- 
erally prosperous, furnished an instance of this kind. But 
it will commonly happen that the phenomena of over- 
production are not due so much to excess of supply in 
one line as to contraction of demand in a number of lines 
simultaneously. Such a contraction is the central fact in 
any commercial crisis. These crises have occurred with 
tolerable regularity ever since the introduction of applied 
steam power. They have usually come once in ten or 
eleven years, — a fact which led some observers to connect 
them with sun spots which have a period of the same 
length. But no one could say just Avhy the sun spots 
produced the crises, and this theory has been generally 
set aside for lack of proof. The accepted view of the 
phenomena of commercial crises makes them the result of 
contractions in credit of the kind described in chapter viii. 

§ 332. The aggregate volume of pecuniary transactions 
which can be performed in the course of a year with a 
given reserve of money depends upon the efficiency of 



296 PROFITS. 

the credit system ; that is, in general, upon the freedom 
with which banks are able and willing to insure the pay- 
ment of money in the future by people who have not the 
money in hand at present. If for any reason the banks 
are compelled, or think themselves compelled, to reduce 
the accommodation of this kind which they give the mer- 
cantile community, the men who wish to deliver money 
cannot pay so much, and of course men who wish to re- 
ceive money cannot obtain so much. The decrease in the 
effective circulation of money causes a decrease of the 
volume of business. Either the physical amount of the 
transactions must be lessened or the average level of 
prices must fall. Each of these things causes commercial 
disaster. A fall in price prevents a great many people 
from fulfiUincr their contracts. A fall in the number of 
transactions prevents some of them from getting what 
they need as consumers and from selling their surplus as 
producers. We have a congestion in all the channels of 
trade. We find all the phenomena of over-production in 
a great number of different lines, not because the invest- 
ments in those lines have been disproportionate to one 
another, but because the contraction of credit makes the 
general production of the community disproportionate to 
the means of getting it into the right hands.' 

This is, in brief, the description of a modern commercial 
crisis. With varying details but with the same general 
features, it has been illustrated in 1825, 1837, 1847, 1857, 
1873, 1884, and 1893. As exchange and transportation 
have developed, crises have become more and more uni- 
versal in their pressure. As matters stand today, there is 
scarcely an industrial nation which stands apart from their 
evil influence. A paralysis of credit and trade in one 
country commonly makes itself felt in the others. 

^ Newcomb has an interesting analysis of these events, showing how a 
contraction in the " monetary circulation " of means of payment produce* 
a corresponding effect on the " industrial circulation " of goods and services 
which consumers are anxious to receive and producers to render. 



COMMERCIAL CRISES. , 29/ 

§ 333' The order of events in such a crisis is generally 
this : 

(i) A shock to public confidence in a period of liberal, 
not to say inflated, credit, creates a demand for ready 
money. No one is sure that his neighbor will remain 
solvent. Each man is therefore anxious to secure him- 
self against future loss. Every borrower seeks means of 
paying his obligations and increases the demand for 
money ; almost every capitalist tries to enlarge his cash 
reserves and thus lessens the available supply. 

(2) This increase of demand and diminution of supply 
at first puts up the Interest rate on short-time loans. 
Money Is needed to tide over the immediate exigency, 
and every one Is willing to pay large prices In order to 
obtain it. But this Is only a temporary measure. Under 
the stress of need for securing money, people who have 
engagements to meet sell their goods at a sacrifice in 
order to obtain it. An unusually large supply of products 
and securities is thrown upon the market just at the time 
when many property owners feel themselves least able to 
Invest, and when some consumers are restricting their 
purchases instead of expanding them. The temporary 
increase in the interest rate gives place to a more lasting 
fall in prices. 

(3) Such a fall in prices lowers profits. A large num- 
ber of people have made engagements with their creditors 
and with their employees based on the supposition that 
prices will continue at the old level. If there has been 
a period of Inflation, the prevailing rate of wages and of 
interest have both been driven up to a high figure on 
account of the large profits realized by active speculators. 
A fall in price renders it impossible to pay interest out of 
current earnings. Readjustments and foreclosures follow 
one another in rapid succession. In cases where the 
lenders of money have obtained proper security the con- 
tracts are maintained at the expense of the principal of 



298 PROFITS. 

the borrowers. If a railroad bond is really secured by 
stock behind it, the loss falls on the stockholders, and 
the bondholders, ultimately at any rate, receive all that 
the interest contract called for. But if, as frequently 
happens, the security has been a delusive one, the lend- 
ers are compelled to assent to a reduction of the interest 
which they believed to be safely guaranteed. 

(4) When the interest contracts have been in large 
measure readjusted, the chief effect on wages begins to 
make itself felt. It might be supposed, on general 
grounds, that a fall in price would affect the laborer 
sooner than the investor, because wage contracts are 
made for short periods and are liable to readjustment at 
any moment, while interest contracts are made for a long 
term of years. But in the early stages of a commercial 
crisis the capitalist is not in a position to dictate terms to 
his laborers. He must make goods and sell goods at any 
price, in order to keep his head above water. As long as 
it lasts, the cut-throat competition which lowers profits 
prevents the demand for labor from being very rapidly 
lessened. It is when readjustments of interest have been 
made that the laborers' condition becomes worst. After 
foreclosure sales have been completed and capital is re- 
organized on a new basis, no capitalist is necessarily com- 
pelled to work at a loss, and some probably go out of 
work altogether. Under these circumstances the demand 
for labor becomes appreciably less than it was, and the 
price offered falls rapidly. The first moderate changes 
are as a rule accepted by the laborers as inevitable, but 
as reductions become more sweeping they are resisted, 
particularly because house rents and consumers' prices, 
owing to the inertia of retail trade, do not fall nearly as 
fast as producers' prices. The workman sees his wages 
reduced because his employer cannot sell goods at the old 
figure, while the price that he pays for his supplies remains 
nearly the same. He thinks that something is wrong. 



READJUSTMENT OF VALUES. 299 

and strikes. This usually indicates the beginning of the 
end of a commercial crisis. It has become a proverb 
in the financial world that railroad strikes give no help to 
those who are trying to depress the price of securities. 
On the contrary, in spite of the losses attending such 
conflicts, it has been found in 1877, 1885, and 1894 that 
the price of securities in general began to go up at the 
very time when matters seemed to be at their worst. 
There are two reasons for this. First, strikes cut down 
production in any given line to such an extent as to en- 
able competing producers to dispose of their products or 
services more readily. Second, strikes indicate that wage 
contracts, as well as interest contracts, have been read- 
justed to the price conditions which prevail, and that 
matters have therefore reached a point where speculators 
can make arrangements for the future with the assurance 
that the marginal price charged by labor and capital for 
their services does not exceed the market price which the 
consumers are likely to pay for the results of such service. 

§ 334. Until this process is substantially complete, 
actual prices do not correspond to the assumptions of 
the marginal theory of value. The price which con- 
sumers are ready to pay for the products of industry is 
less than the marginal expense of those products — in- 
cluding in this expense, as we properly must, a return on 
capital invested. Some men, in trying to cover the cost, 
fail to sell their products ; others, in trying to sell their 
products, fail to cover the cost. So far as producers are 
able to fulfil their contracts as to interest and wages — 
and in the theory both of economics and of law they 
should do so completely — the loss falls on rent and 
profits and may convert the expected surplus from these 
sources into a deficit of large amount. 

§ 335- The distributive process, whose workings have 
been described in this chapter, may be summed up as 
follows : 



300 PROFITS. 

The competition of capitalists with one another leads 
them to advance to the laborers a sum equal to the ex- 
pected price of the product, less a compensation for wait- 
ing and the risks attendant upon it, sufficient to induce 
the proprietors to hazard the required amount of capital. 
The advances constitute wages ; the excess of the product 
above such advances constitutes profits. 

By a somewhat similar process the competition of the 
more active capitalists with one another leads them to 
guarantee to those who will lend them capital a fixed rate 
of income for the use of such capital. This income, guar- 
anteed but not advanced, is known as interest ; the re- 
maining profit is known either as net profit for skill in 
management, or economic rent for foresight in invest- 
ment. The separation of interest from net profit or rent 
results in a separation of the reward for waiting from the 
rewards for risk and foresight. 

Wages are, in all ordinary cases, guaranteed and ad- 
vanced by capitalists as a body. Interest is guaranteed, 
but not advanced, by one group of capitalists to another. 
The justice of the charge made for such guarantees and 
advances is to be defended, not because the enjoyment of 
interest corresponds to the sacrifice of waiting or because 
the amount of profit corresponds to the risk of loss, but 
because society finds itself best served by the system of 
guarantees and advances which the institutions of wages 
and interest serve to encourage. 



CHAPTER X. 

WAGES. 

Piece- Wage and Time-Wage — What Constitutes Demand for Labor — The 
Popular Theory — The Wage-Fund Theory — The Residual Theory — ■ 
The Laborer as a Consumer — Wages Depend on Maximum Economy 
of Consumption — With Some Men this is Obtained by Low Wages and 
Low Efficiency, with Others by High Wages and High Efficiency. 

F. A. Walker : " The Wages Question : a Treatise on Wages and the 
Wages Class." New York, 1876. 

F. W. Taussig: "Wages and Capital: an Examination of the Wages- 
Fund Theory." New York, 1896. 

§ 336. Wages, under the modern competitive system, 
are the discounted product of industry. They are what 
capitalists are ready to advance on the expectation of a 
future return. The competition of different employers 
with one another, where it is at all active, prevents them 
from making their rate of discount arbitrary in amount. 

The expected value of the product, less the discount, 
gives the labor cost per unit of product, or piece wage. 
The piece wage received by any workman multiplied by 
the number of pieces which he makes in a day, consti- 
tutes his day's earnings or nominal wage. The amount 
of comforts which he can buy with the money received as 
nominal wages represent his real wage. If A is getting 
$2.50 a day while B is getting only $2.00, his nominal 
wages are one fourth higher ; but if he has to make his 
purchases in a market where the general level of prices is 
fifty per cent higher than those paid by B, his real wages 
are one sixth lower than ^'s. For the $2.00 which B 

301 



302 WAGES. 

receives will buy as much as A could obtain with $3.00, 
and decidedly more than he obtains with $2.50. 

Strictly speaking, both nominal and real wages should 
be estimated by the year (or even by the lifetime), rather 
than by the day, in order to show anything about the 
financial or economic condition of the laborer ; because 
the regularity and duration of employment is so much 
less in some trades than in others that the same receipts 
per working day mean very different things in the long 
run. In practice, however, it is usual to quote nominal 
wages by the day, and then make corrections for irregu- 
larity of employment, limited duration of labor power, 
and other factors of this sort which affect our inferences 
from the apparent height of the wage figures, 

§ 337- The cost of labor to the employer is naturally 
measured by the piece ; the return for labor to the work- 
man is naturally measured by the day or year. This 
does not mean that the employer will always wish to pay 
his laborers by the piece, or that the laborers will always 
prefer to be paid by the day. The choice between the 
two systems will depend chiefly upon the line of employ- 
ment. Time wages prevail in agriculture, in trades, in 
personal service, and in the higher grades of mechanical 
work ; piece wages, in mechanical work of ordinary 
grades. 

Under the system of time wages the workman has no 
immediate or obvious incentive to increase his output. 
A large part of the time and strength of the foreman is 
occupied in keeping the men under his charge up to a 
proper standard of efficiency. To avoid this difficulty, 
the introduction of piece wages is the most obvious ex- 
pedient. Under this system the workman is paid, not on 
the basis of time occupied, but on the basis of work done ; 
not by the hour or the day, but by the yard, the pound, 
or some other unit of measure. If one operative turns 
out twice as many goods as another, he receives twice as 



PIECE-WORK AND TIME-WORK. 303 

much pay. He thus has an incentive to work rapidly. 
In fact, the danger is that he may work too rapidly for 
his own good or for that of his work. Under the piece- 
work system there is little need of insisting on quantity, 
but much need of insisting on quality. Where the latter 
object can readily be secured by a simple process of in- 
spection, the employer always prefers to pay by the piece ; 
where this is impossible, he has to pay by time. In tex- 
tile weaving, where the grades of goods are simple and 
definite, it is easy for an inspector to say whether a cer- 
tain piece of cloth should be passed or rejected. Weav- 
ing is therefore done by the piece ; the inspector looks 
out for the quality and the operative for the quantity. 
But in the work of a machinist, where it is impossible to 
inspect the results quickly and surely, the workman must 
be given every incentive to do his work well rather than 
to do it hurriedly. He is therefore paid by the day ; he 
looks out for the quality of his work and the foreman for 
its quantity. 

§ 338. Differences in the rate of wages among produ- 
cers of marketable goods are due far more to variations 
in efficiency than to variations in piece wages. If we 
arrange laborers of different countries in the order of 
their earning power, we shall find a corresponding differ- 
ence in their efficiency. America stands highest, and 
England next, followed by other countries of western 
Europe ; the efficiency of the laborer of eastern Europe 
is much lower, and that of India lowest of all.' 

Nor is this at all surprising. Where different laborers 
compete in producing the same article for the same mar- 
ket, there are many things which tend to make the wage 
payments per unit of product substantially the same for 

' F. A. Walker, "Political Economy," p. 56. For fuller details, excel- 
lently presented by the same author, see "The Wages Question," ch. iii. 
Similiar conclusions are reached by Brassey, Schoenhof, and Schulze- 
Gaevernitz. 



304 WAGES. 

all the competitors. If the piece wage for one group of 
employers differs greatly from that for another, competi- 
tion tends either (i) to force the price of the product so 
low as to drive the high cost labor out of business ; or (2) 
if the amount of low cost labor is inadequate to do this, 
the persistent high price produces an extra profit to the 
employers of low cost labor, which other capitalists are 
anxious to share ; and the competition of new capital, 
bidding for the services of a restricted supply of low 
cost labor, forces up the rate of piece wages which the 
laborers can demand. For instance, if one group of 
laborers makes a yard of cloth for ten cents, and another 
group charges fifteen cents for the same service, it gen- 
erally happens either that the employers of the former 
group flood the market with products at fourteen cents 
and drive the latter group out of business, or else that all 
sell their products at a price above fifteen cents, and that 
competition between different capitalists for the services 
of the low cost labor forces its price up to a level which 
leaves only the ordinary rate of profit. In the former 
case the general wage-level would go down to ten cents ; in 
the latter case it would go up to fifteen cents ; in either 
alternative we should see an equalization of piece wages 
among such laborers as continued to compete. • 

§ 339. There are only two considerable exceptions to the 
rule here laid down, (i) When different competitors use 
different methods of production, interest may take a larger 
share of the product in the one case than in the other, and 
equal prices of products, fixed by competition, may leave 
unequal remainders for labor. (2) When the operation of 
low cost labor is restricted to land of exceptional advan- 
tage, or otherwise limited by monopoly, there may not 
be enough competition of capital to give the low cost 
laborer the advantage of his superior economy. But the 
importance of these exceptions, especially the former, 
is much overestimated. One of \he facts which most 



PAYMENT FOR SERVICES. 305 

strongly impresses the student of industrial statistics is 
the comparatively small range of variation in piece prices 
for competing goods, even where the conditions of pro- 
duction are wholly dissimilar. 

§ 340. On the other hand, the labor cost of services, as 
distinct from goods, shows a very wide range of variation. 
This is because a community must have a certain number 
of people engaged in personal and professional service, 
and must pay them wages corresponding to what their 
efficiency would secure if they zvere engaged in the prodtcc- 
tio7i of goods for market. The greater the productiveness 
of industrial labor in any community, the higher will be 
the cost of those services in which the laborer has no in- 
dustrial advantage over those who perform similar services 
elsewhere. The price of personal and professional service 
in America is high because the people who render it 
could make large products by going into industrial em- 
ployments.' To induce them to enter the former field,, 
they must be paid at a rate based upon their probable 
efificiency in the latter. 

§ 341. In occupations requiring no special skill, if the 
rate of wages as fixed by the discounted value of the pro- 
duct is insufiEicient to keep the laborer alive, the number 
of laborers will be rapidly reduced. This will diminish, 
the supply of products in any industry where it occurs^, 
and will increase their price. This process will go on in. 
manufacturing industries until the discounted price of the- 
product rises high enough to enable the laborer to buy the: 
necessary amount of food ; it will go on in agricultural 
industries until cultivation is restricted to more advan- 
tageous lands or systems of tillage, so that the per capita 
product is large enough to maintain the workmen in 

' For the same reason we are apt to have a relatively wide margin between 
wholesale and retail prices ; because the American retailer charges more per 
day for his services than the foreign retailer, without always being able ta 
handle a correspondingly larger amount of products in the course of a day. , 



306 WAGES. 

undiminished numbers. Conversely, if the rate of wages 
is more than sufficient to keep the laborer alive, there is a 
similar tendency (though not so universally operative) to 
increase numbers and reduce the price of the product, 
until the limit of subsistence is reached. 

In occupations of higher grade, there is a similar mini- 
mum of wages fixed by the cost of educating and maintain- 
ing a laborer in the manner necessary to their successful 
prosecution. If the remuneration of high-grade labor 
falls below the cost of educating and supporting it, the 
number of laborers must necessarily diminish and the price 
of products will tend to rise. If, on the other hand, the 
remuneration is in excess of the cost of education and 
maintenance, there is a tendency towards increase of 
number of laborers and fall in price of products. 

§ 342. It might seem at first sight as though we had 
solved the problem of wages by thus indicating the con- 
ditions under which the supply and demand of labor of 
any grade are in equilibrium. But when we look closely 
at the relations between supply and demand for labor in 
any particular trade, we are confronted with a new diffi- 
culty. The demand for labor is measured by the piece ; 
the supply of labor is measured by the day. No equa- 
tion between the two is possible until we know the num- 
ber of pieces produced in a day ; and this is often 
precisely what is hardest to determine. A community 
stands ready to employ laborers in producing 10,000 
yards of cloth at ten cents per yard, 1 1,000 at nine cents, 
12,500 at eight cents, 15,000 at seven cents, etc. Whether 
the 10,000 yards of cloth be made by 1,000 men earning 
$1.00 per day or 500 men earning $2.00 per day is gener- 
ally a matter of indifference to the buyers. On the other 
hand we find 1,000 men ready to vv^ork in cloth factories 
at $2.00 a day, 900 at $1.75, 800 at $1.50, 700 at $1.25, 
600 at $1.00, etc. Whether they make the $2.00 by pro- 
ducing 20 yards at ten cents, or by the use of improved 



THE MEDIEVAL SYSTEM. 307 

machinery which will enable them to produce 25 yards at 
eight cents, is in the majority of cases a secondary matter 
to the wage-earners. Instead of one solution which equa- 
lizes supply and demand we have an indefinite number 
of possible solutions based on the varying rate of speed of 
different laborers. 

■ § 343. When there is little competition of capitalists, 
there is a tendency to accept the solution which gives the 
laborer just enough to keep him alive, and to get what 
service can be obtained from a body of workers of low 
efHciency. In cases of this kind the position of the com- 
mon laborer is very like that of a slave, and the only 
escape from this lot is by combinations of labor strong 
enough for physical as well as industrial defense. Under 
this system, which was substantially that of mediaeval 
society, we find : 

(i) A large body of peasants, producing food for the 
whole community, and receiving enough of the bare 
necessaries of life to keep them in condition to work. 
The only thing that can raise their condition is a plague 
or other destructive agency which so reduces their num- 
bers as to give a scarcity value to their services, lasting 
long enough to establish a customary rate of wages higher 
than that which they had previously received — a state of 
things exemplified in England from the thirteenth to the 
fifteenth century. 

(2) A body of craftsmen, whose numbers are determined 
chiefly by the demand of the rich for their products, who 
receive enough to pay the expenses incident to their edu- 
cation and the maintenance of their station in life, and 
who are sufficiently organized to resist any attempt to re- 
duce their wages below this figure. 

(3) The privileged classes, controlling at once the prop- 
erty and the political power of the nation, who use the 
surplus food produced by the peasants, not as a means of 
giving employment to labor, but as a means of supporting 



30 8 WAGES. 

in idleness a number of persons corresponding to the 
amount of available food. 

§ 344. It is the theory of most socialists that this state 
of things continues to the present day ; that the unor- 
ganized laborer receives starvation wages ; that the organ- 
ized laborer is able to insist on something more by virtue 
of combination ; but that the property owners or capital- 
ists are the residual claimants of an enormous surplus. 
The use of this surplus as capital, the socialists regard as 
an attempt on the part of the property owners to pur- 
chase more labor at starvation rates and appropriate a 
new surplus to themselves. In other words, they think 
that the modern industrial system really applies mediaeval 
methods of distribution to the increased number of peo- 
ple which the use of modern methods of production has 
enabled the land to support. They beheve that any in- 
crease in the efBciency of labor helps the employers and 
not the employed. A single laborer may raise his earnings 
by increasing his speed ; but he thereby increases the sup- 
ply of labor, reducing the piece price for his fellows and 
for himself. The socialists (and many observers who are 
not socialists) think that if one group of persons has ready 
money, or things which can be converted into ready money, 
while another group has labor to sell for this money, an 
increase of the efificiency of labor will put the latter group 
at a disadvantage in all its bargains. As the labor makes 
more products the price of products will be cheapened. 
The capitalists, or people who own the money, will be in a 
position to get more products for the same expenditure. 
If they increase their consumption in proportion to the 
increase of efficiency of labor, they will enjoy more goods 
and leave the laborers neither better nor worse off than 
they were before. If on the other hand they do not thus 
increase their consumption, some of the laborers will be 
thrown out of employment and left to starve. 

The large body of people who take this view of the 



THE POPULAR THEORY. 309 

matter — often without really formulating it in detail — re- 
gard the luxury of the rich as being on the whole a means 
of preventing harm to the poor. They regard free ex- 
penditure of the capitalists' money as a gain to the laborers, 
and its saving as a loss. Industry on the part of the 
wealthy sometimes seems to them a greater vice than idle- 
ness ; for by the exerciseof industry the rich man appears 
to take the bread out of the poor man's mouth and to de- 
prive some laborer of the chance for a living in order to 
add a few dollars to an already overgrown fortune ; while 
if he lives in idleness and buys the labor of others, they 
think that he at least transfers some part of his wealth to 
those who need it more than he does. They often look 
with complacency on the actual destruction of wealth as 
a blessing in disguise. The broken window pane or burnt 
house becomes in their eyes a source of new employment 
to labor, transferring money from the pockets of the men 
who own property to those of the men who are dependent 
on their work for support. Not a few of them advocate 
inflation of the currency, by every conceivable means 
whether practicable or not, in the belief that whatever 
increases the supply of money increases the demand for 
labor and the advantage of the laboring classes. 

§ 345. This view of the matter is justly criticised as a 
superficial one. It looks at temporary effects on nominal 
wages, and disregards permanent effects on real wages. 
A fire may increase wage-payments in certain trades in a 
particular locality ; but there are two indirect consequences 
of the fire which generally make the apparent advantage 
to laborers worse than illusory. In the first place, the 
money used to rebuild the burnt house is almost always 
diverted from some other line of expenditure, so that the 
gain to one group of workmen is offset by a loss to other 
groups. In the second place, this utilization of labor to 
replace commodities which have been destroyed, instead 
of producing new ones, means that the community in the 



3IO WAGES. 

end has fewer comforts and enjoyments than it could 
otherwise have commanded. This scarcity shows itself 
in advanced prices. For a considerable time after a fire, 
house rents will be higher than they were before ; so that 
the same amount of nominal wages means less available 
comfort and enjoyment. The laborers are producing for 
one another as well as for the capitalist. They are spend- 
ing money for one another's products ; as consumers they 
profit by an increase in the product, or suffer by its dimin- 
ution. The destruction of property by the fire does not 
represent something taken from the capitalist and given 
to the laborer. It represents a loss of comfort in the com- 
munity from which, as a rule, no class can wholly exempt 
itself. 

Nor does the money which the rich man saves repre- 
sent something taken from the laborers and accruing to 
the capitalists as a class. The man who saves money and 
invests it is simply spending it in a far-sighted way, and 
paying laborers for services which meet the future wants 
of many men instead of the present luxuries of one 
man. 

The man who spends money in employing laborers on 
things that are really useless, causes food to be consumed 
by a group of workers who leave nothing permanent to 
show for it, and lessens the amount of useful things which 
the community can enjoy in the immediate future. He 
usually does more harm than the man who saves money 
and hoards it ; for while hoarding chiefly affects nominal 
wages, unwise expenditure affects real wages. The harm 
done by the miser is a negative one — he fails to make use 
of the opportunities which have been given him. The 
harm done by the spendthrift, though not equally obvious 
to the popular vision, is a positive one — he actually leaves 
fewer products for other people to enjoy. 

If we look at real wages instead of nominal ones, at 
things instead of money, we shall see that it is not the 



THE WAGE-FUND THEORY. 3II 

wealth that the capitaHst consumes which really goes to 
the laborers, but the wealth that he does not consume/ 

§ 346. By those who have grasped this fact it is uni- 
versally held that increased production due to efficiency 
of labor accrues very largely to the laborers themselves. 

During the early part of the present century the great 
body of economists believed that this process was effected 
through the agency of what they called a wage-fund. 
This fund consisted of that part of the past product of 
the community which was not consumed, but set aside 
by the capitalists to assist futurve production. In the 
very act of directing productive industry, this product 
was transferred from the capitalists to the laborers in the 
form of a wage-payment. The total quantity of the 
unconsumed product thus used as capital represented the 
aggregate real wages of the community. It was this capi- 
tal and not the desires or wants of the consumers which 
fixed the amount received by the laborers as wages. De- 
sires and wants of consumers might determine the direc- 
tion in which labor was applied ; they did not determine 
the quantity of its aggregate remuneration, except so far 
as they might cause labor to be misapplied and prevent 
the future capital of the community from becoming as 
great as it otherwise might be. If a man employed laborers 
in trimming a lawn instead of cultivating a wheat field, he 
did not thereby either increase or diminish this year's 
wages ; these were determined by last year's product. 
But he diminished the amount of next year's real wages, 
because he caused less wheat to be produced, and thereby 

' This is what is really meant by the somewhat infelicitous phrase, used by 
many economists, that a demand for commodities is not a demand for labor. 
The demand for labor, using the word demand in its older sense of " aggre- 
gate price offered," rather than " quantity demanded," [(§ 89, note)] is not to 
be increased by increasing the price which consumers are compelled to pay 
for commodities, but by increasing the capital available for the maintenance 
of labor. The personal consumption of the property owners is no measure- 
of the amount of comforts which will go to the support of the laborers. 



312 WAGES. 

lessened the amount available for the support of next 
year's labor. That industry was limited by capital and 
not by consumers' wants, constituted the cardinal point in 
the wage-fund theory. Whatever tended to increase or 
diminish public capital, tended to increase or diminish, 
the fund from which real wages were paid, and by which 
they were measured. This fund could be increased by 
efificiency on the part of the laborers, or by saving on the 
part of the property owners. It could be diminished by 
destruction of property, by idleness, or by useless luxury. 
If the laborers, by combination or by favorable circum- 
stances of any kind, got an unduly large share of the 
national income in one period of production, they so 
lessened the rate of profit that the inducement to save 
was diminished ; and this tended to diminish capital and 
wages for the years following. If, on the other hand, they 
were deprived of a part of their share during one year, 
profits were so increased that there would be a greater 
stimulus to save ; the wage-fund for the following years 
would thus be enlarged, and the loss to the laborers 
would prove only temporary. 

To find the average rate of wages in any community, 
according to this theory, it was only necessary to divide 
its total wage-fund by the number of the laboring popula- 
tion. The general rate of wages as thus established could 
not be effectively raised except by an increase of the wage- 
fund, or a diminution of numbers. The free capital or 
wage-fund constituted the source of the demand for labor; 
the laboring population represented the supply ; the aver- 
age rate of wages was fixed by the ratio between the two.' 

§ 347. The wage-fund theory, at any rate in the form 
in which it is presented by its more uncompromising 
advocates, involves several unwarranted assumptions. 

' It was one of those cases where the supply of labor was synonymous with 
the stock, because the laborer without capital could not wait, but must sell 
his services at once. Compare § 94. 



THE WAGE-FUND THEORY CRITICISED. 313 

If we accept MacCulloch's definition of capital as com- 
prising all those portions of the products of industry that 
may be directly employed either to support human exer- 
tion or to facilitate production, we shall find that the 
amount of real wages falls very far short of what the 
theory requires. Not all the things that may be em- 
ployed for this purpose, are thus employed. A part is 
spent in charity. A part gets into the hands of criminal 
or semi-criminal classes, who convert it to their own uses 
without giving society any return. A part is destroyed 
by time and natural decay without reaching the consumer 
at all. 

Nor does the amount actually used as capital bear any 
fixed proportion to the total product which might possibly 
be thus used. The proportion wasted is by no means con- 
stant. It varies from place to place and from year to 
year. The ability of a community to pay high wages 
seems to depend more upon the avoidance of waste than 
upon the increase of accumulations. Laborers are better 
off where there is a small surplus effectively utilized, than 
where there is a large surplus ineffectively utilized. As 
Newcomb well expresses it, wages are a flow and not a 
fund. They are a quota of the national income rather 
than of the national capital. 

§ 349. Contrast the conditions affecting wages in old 
and new countries. The old countries have large amounts 
of capital ; not only large in the aggregate, but large in 
proportion to the number of laborers. New countries, 
settled by men of the same race, have relatively small 
amounts of capital. According to the wage-fund theory 
wages should be high in the old country and low in the 
new. But the facts are just the reverse. It is the new 
country, with small capital, that has the high wages. Nor 
can this difference be explained, as Cairnes ingeniously 
undertakes to explain it, by saying that the capital of the 
old country is invested in machinery, and that the supply 



314 WAGES. 

of products constituting the wage-fund available for the 
use of its laborers is therefore small. Making all due 
allowance for the large amount of wealth represented by 
machinery, it still remains true that the supply of unused 
and disposable products in an old country is much larger 
in proportion to its population than is the case in a newer 
one. The reason for the difference in wages must be 
sought chiefly in the fact of the superior utilization of its 
small stock of capital by the new country, where business 
is active and idlers are few. 

We find the same point illustrated by the conditions 
which prevail at the close of a war. At such a time the 
supply of unconsumed products is apt to be small ; but 
if the war has not lasted long enough to destroy the spirit 
of business enterprise, nor been so disastrous as to paralyze 
ambition, wages will generally be high. The effort to 
regain lost ground, and the impossibility of supporting 
idlers, cause all the available resources to be used in such 
a way as to counterbalance the evil to the laboring classes 
which would otherwise result from the diminished amount 
of capital. 

This point is even more conspicuously illustrated in the 
course of a commercial crisis. At the beginning of such a 
crisis there is a large stock of unsold commodities await- 
ing consumption. Statistics of the different trades will 
show the presence of all the conditions which, according 
to the wage-fund theory, should promise prosperity to 
the workmen and continuance of high real wages. Yet 
somehow the very amount of these commodities seems to 
form an obstacle to their utilization. People are so afraid 
to continue their production when there are too many un- 
sold products on hand, that the demand for labor is less- 
ened and wages fall. A few years later, when the stocks 
of goods have wasted away and the surplus on hand is 
small, a revival of business, stimulated by the very small- 
ness of visible stocks of goods, results in giving the laborer 



INDUSTRY AND CAPITAL. 315 

large employment and a large share in the product. Under 
such circumstances it may happen that his wages are not 
limited by the amount of goods left over from past periods 
of production. If he receives large money payments, and 
does not spend all of the money thus obtained until the 
next period of production has become so far advanced 
that the goods produced during that period are placed at 
his disposal, he can actually obtain his real wages, not out 
of past accumulations, but out of current products. 

§ 350. These illustrations are enough to show that there 
is a fallacy in the idea that industry is limited by capital. 
In one sense of the word " limited," this proposition Is 
measurably true ; for the amount which goes to the sup- 
port of the laborers cannot, except under rare conditions, 
exceed the unconsumed surplus from previous periods of 
production. But as the word is commonly understood, 
it means something more than this. If we say that one 
thing is limited by another we imply, not only that the 
first cannot exceed the second, but that it habitually 
comes up to the bounds set by the second. If we say 
that the chance of aerial navigation is limited by the 
height of the atmosphere, we do not mean that a balloon 
could not go higher than the atmosphere does, which is un- 
doubtedly true ; but that it can go as high as the atmos- 
phere does, which is undoubtedly false. If we say that 
wages are limited by capital, we are naturally understood 
as meaning that wages go as high as the amount of 
accumulations will permit ; and in modern industrial 
society this proposition is not borne out by the facts.* 

* The wage-fund theory seems to involve a certain confusion between 
capital as a mode of measurement of wealth (§ 5), and capital as a mode of 
use of wealth (§§ 7, 138). If we look at MacCuUoch's view that the wealth 
of the community measured as capital furnishes an indication of the amount 
which will be paid in wages, we are justified in saying that the proposition 
is important but untrue. If we look at Ricardo's view, that it is the amount 
of wealth used as capital which furnishes the indication of the amount of 
wages, we have a proposition which is true, but relatively unimportant. The 



3 1 6 WA GES. 

§ 351. According to the theory which is held by most 
modern economists, wages are kept up, not by the exist- 
ence of a fund of pubHc capital which must necessarily go 
to the laborer, but by the competition of a number of 
individual capitalists, which reduces profits to a minimum 
and compels them to give the laborer as large a share of 
his product as is consistent with the continuance of indus- 
trial enterprise. The advocates of this theory claim that 
there is such activity in the accumulation of capital that 
competition secures to the laborer the chief benefit of 
modern improvements, and forces the capitalist to con- 
tent himself with a small fraction of the gain instead of 
the lion's share. 

The piece-price which the employer can afford to pay in 
the long run, is the price of the product less the interest 
on the capital involved in its production ; and in the long 
run he is also compelled to pay as much as this. For if 
the price of the product more than pays wages and in- 
terest, new competition sets in which drives prices down 
and wages up ; and if, on the other hand, the price of the 
product less than pays wages and interest, the invested 

error of the advocates of the wage-fund theory consists in the assumption 
that the logic of Ricardo can be applied to the concept of MacCuUoch. 
They see that the payment of wages represents an investment of capital ; 
they proceed to assume that the amount of such investment will bear a de- 
terminate proportion to the total amount of unconsumed surplus which is 
physically capable of investment. But the two things are totally different ; 
nor does the amount of the one bear any fixed ratio to that of the other. 

When John Stuart Mill defined capital as including whatever things are 
destined to supply productive labor with the various means needed for the 
process of production, and thus remitted to the mind of the employer the 
determination of the amount of the wage-fund, he had implicitly aban- 
doned the views of his immediate predecessors. But at the time when he 
wrote his " Principles of Political Economy," he was far from perceiving the 
real bearing of this change on the doctrine of wages. It was not until 
Longe and Thornton, and afterwards Walker, showed how conspicuously 
the wage-fund theory failed to explain the facts of industry, that proper im- 
portance was given to the anticipated value of a future product in deter- 
mining the share of the past product of industry which goes to the laborers. 



THE RESIDUAL THEORY. 317 

capital is allowed to wear out without being replaced 
until prices are driven up and wages down. Neither of 
these processes is under modern conditions a quick one, 
but both are sure to come about in course of time. It 
is from observation of these facts that Walker has de- 
duced his theory that wages are the residual share of *^ 
the product of industry. If we look at any one establish- 
ment, for a short period, this statement seems palpably 
untrue ; for the employer pays a stipulated sum in the 
form of wages, and takes whatever may be left. But if 
we look at the industry as a whole, and at the course of 
events in the long run, we find much to confirm General 
Walker's view. 

§ 352, The residual theory has a great advantage over 
its two predecessors, in explaining accurately the facts of 
modern business. It shows, as the popular theory cannot, 
why wages are high where labor is efficient. It explains, 
as the wage-fund theory fails to do, why wages are high 
when unconsumed products are scarce. It makes wages 
depend on a flow of capital instead of a fund. But it is 
not quite free from unwarranted assumptions. In laying 
stress on the competition of capitalists with one another, 
it seems to lose sight of the corresponding competition 
among laborers. Increase of numbers is tending to drive 
wages down in the same way that increase of capital is 
tending to drive profits down. To be sure, the cases are 
not quite parallel ; for a reduction in the rate of profit 
means increased demand for labor, while a reduction in 
the rate of wages means diminished demand for capital.' 

^ If the rate of profit falls, the laborer gets more nearly the whole amount 
of the product. But if the rate of wages falls we have a corresponding fall 
in prices and little change in the relative shares of labor and capital. 

It is a common but erroneous assumption that if general wages are reduced 
profits will rise. A fall in real wages, the methods of industry remaining 
unchanged, means that less capital need be advanced in productive industry. 
Xow this lessened demand for capital would certainly not raise the rate of 
profit — if anything it would probably lower it. If the amount of invested 



3l8 WAGES. 

But this only amounts to saying that while part of the 
gain from low profits goes to the laborer, all of the gain 
from low wages goes to the consumer. It is the con- 
sumer who is the residual claimant in the results of 
modern industrial improvements. Inactive competition 
on the part of any large group of producers may delay 
this result ' ; it cannot essentially alter it. No one group 
of producers can be marked as a residual claimant under 
the modern process of industrial competition. Most of 
the gain from any improvement in production ultimately 
goes to the consumer, whoever he may be, by enabling 
him to get his products cheaper. 

§ 353. Here we find a grain of truth in the much 
despised popular theory. It is the possessors of ready 
money that derive the chief advantage from improved 
efficiency of labor. The error of the popular view of 
wages is not in its assumption that increased efficiency 
gives its main benefit to the buyers of products, but in 
the assumption t^at those buyers are necessarily the rich, 
the holders of accumulated wealth. A man's power of 
consumption is measured by the income he receives rather 
than by the capital which he owns. If his labor affords 
him an income of one thousand dollars a year and he 
spends it all, he never obtains any accumulated wealth, 
but he obtains an enormous advantage from the large 
amount of comforts which modern industrial processes 
have placed at his disposal. The gain from an improve- 

capital is diminished and the rate of profit not increased, the aggregate of 
profit falls with a fall in wages, and the whole gain goes to the consumer. 

Of course, if an individual employer can reduce wages, he thereby 
increases his profits ; and an observation of this fact has doubtless been the 
source of the mistaken belief that what can happen in each particular case 
can happen in all simultaneously. 

* Cases of this kind have given rise to an opinion, frequently expressed, 
that the benefit of improvements goes to the owners of the productive agent 
which increases most slowly, be it land, labor, or capital. This seems to be 
a much more sweeping generalization than is warranted either by the facts 
or the theoretical proofs which have been adduced to support it. 



LABORERS AS CONSUMERS. 319 

ment goes chiefly to those who consume the products 
cheapened by such an improvement ; and these may be 
either laborers or capitahsts. The study of distribution 
of wealth between different classes resolves itself into a 
study of the consumption of wealth by different classes. 
If an improvement in production is of such a character as 
to cheapen goods used by capitalists, and not to affect 
those used by laborers, the popular theory of wages is the 
true one. The gain in such a case goes entirely to the 
rich. If, on the other hand, the improvement is such as 
to cheapen products used by the laborer, and not by the 
capitalist, the gain goes entirely to the laborer, and the 
wage-fund theory is the more correct one. The popular 
theory tacitly assumes that every improvement is of the 
former class. In point of fact, modern improvements 
belong chiefly to the latter. 

§ 354. Let us look at this matter in detail. Suppose 
that it were thus possible to divide goods into two classes ; 
one used hy the rich, the other by the poor. An improve- 
ment in the production of goods consumed by the rich 
would cheapen the price of such goods and enable the 
rich to get more for their money. This would be the 
only effect. It would not increase the amount of real 
capital available for the support of labor, except in a very 
slight degree, by an indirect process of redistribution of 
producers in different employments. The surplus avail- 
able for laborers would probably remain unchanged. The 
activity of capital in giving employment to labor would 
find itself restricted within narrow limits. 

Suppose, on the other hand, that the increase is con- 
fined to things which laborers use. Under such a con- 
dition the rich would find themselves practically compelled 
to reinvest the whole surplus. They would have no 
use for the increased production. They would be forced 
to convert it into capital. The benefit of the surplus 
would accrue to the laborers in the form of a direct and 



320 WAGES. 

immediate increase of real wages. Barring losses from 
waste, and from the consumption of this increased pro- 
duct by idlers instead of laborers, the wage-fund theory 
in a case like this would be substantially the true 
one. 

What we actually see is something intermediate between 
these two cases, but nearer the second than the first. Im- 
proved methods have not cheapened the products which 
are used by the rich exclusively. Champagne and yachts 
and race horses are as costly as ever. They cheapen pro- 
ducts which are used by poor as well as rich. Nearly all 
the large improvements in modern industry have de- 
pended for their success upon the creation of a wide 
market (§ 179), appealing not only to those who have 
accumulated large fortunes, but to those who live more 
or less prosperously on the results of their labor. Under 
these circumstances we find an active competition, both, 
for the services of the laborer as a producer and for the 
money of the laborer as a consumer ; especially the latter. 
The laborer is the residual claimant in modern industry,, 
not solely nor chiefly on account of his profit in the in- 
crease of production, but on account of his profit in the 
increase of consumption. 

§ 355. If the effect of increased efificiency in produc- 
tion is to enlarge the amount of products available to 
the laborer as a consumer, the question at once arises, 
what he Avill do with the surplus. Four possibilities are 
open to any group of laborers : 

1. They may increase their numbers, making the aver- 
age size of their families larger. 

2. They may shorten their hours of labor. 

3. They may enlarge their consumption of the products 
of other laborers. 

4. They may save money ; that is, they may waive the 
enjoyment of a part of their income and put it at the 
disposal of other members of the community, for the 



ALTERNATIVES OPEN TO LABOR. 32 1 

sake of a future return which they anticipate from such 
present abstinence. 

The choice between these alternatives depends largely 
upon the character of the laborer himself. 

If he is influenced by the force of custom, and is not in 
the habit of reasoning at all, he will unconsciously choose 
the first alternative, supporting an increased family in the 
old standard of comfort and bringing up a number of 
children who in the next generation will increase the in- 
tensity of competition of laborers with one another. 

If he pursues short-sighted lines of reasoning, he will 
take advantage of the improvement to lessen his hours of 
labor, being able to obtain the old amount of comfort with 
less expenditure of effort. Whether this change is a gain 
or a loss to the community will depend largely on the way 
in which he uses his leisure. If the time is spent in loaf- 
ing, with its habitual concomitants, it will be a loss ; if it 
is spent in rational enjoyment, it will pave the way for the 
third alternative of diversified consumption, and will be 
a means of real gain to the individual and progress to the 
community as a whole. 

If he is in the habit of far-sighted reasoning, he will 
choose either the third or the fourth alternative. Redu- 
cing his labor very little, and making up by increased 
speed for any slight reduction in hours, the far-sighted man 
Avill take the fullest advantage of his gain as a consumer 
and will utilize the change to secure more enjoyment,, 
either present or future, rather than to do less work. 
He will not increase his family or diminish his output, 
but will increase his comfort for the present and his pro- 
vision for the future. 

§ 356. These differences may be illustrated mathemati- 
cally as follows : 

On the line OX (Fig. 10) lay off equal parts represent- 
ing units of time of labor — say hours of work per day. 
At each of these points draw a line parallel to OY, repre- 



122 



WAGES. 



senting the intensity of enjoyment derived from the 
results of the labor of that hour ; or, what is substan- 




tially the same thing, the sacrifice which would be involved 
in going without them. As the number of hours increases, 
the intensity of enjoyment tends to diminish. The first 
hours represent the difference between death and life, 
and their product may be said to have infinite * utility. 
Longer hours mean an increase in the total comfort 
available ; bat this increment becomes less marked as 
the working day grows longer. If we connect the ex- 
tremes of these lines measuring satisfaction, we obtain 
a curve whose height at any point represents the de- 
gree of enjoyment secured by the last unit of labor time, 
while the total area between the curve and the two axes 
represents the total enjoyment which the individual ob- 
tains by his work. 

If we represent the pain of successive hours of labor in 
like manner, by lines drawn downward from OX, we can 
construct a similar curve, below the axis, representing the 

' Patten uses the term " absolute" instead of "infinite," which is per- 
fectly proper ; but he measures it by zero instead of infinity, which hardly 
seems right. For the thing which is barely distinguishable from a necessity 
involves a very great sacrifice, when people are forced to give it up, not a 
very small one, and thus approximates to infinity instead of to zero. 



BALANCE OF PLEASURE AND PAIN. 323 

sacrifices, direct and indirect ' which the laborer undergoes. 
These sacrifices during the early hours will be compara- 
tively slight ; there may even be, as Jevons suggests, a 
balance of pleasure in working rather than in not working, 
in which case the curve of labor will rise above the axis. 
But, as the hours increase, the pain and sacrifice also in- 
crease. The laborer who exercises free judgment will go 
on working until the (diminishing) increment of satisfac- 
tion from the product just balances the increasing pain 
and sacrifice from the labor. At that point he will stop. 
In the illustration given, this condition of things comes 
into play at the end of the ninth hour. Everything 
before that gives a balance of satisfaction over pain and 
sacrifice. Everything after that gives a balance in the 
other direction. 

§ 357- What will be the effect on this balance, if the 
laborer, either through his own increase of efficiency or 
through the cheapening of the products of others, is able 
to get more products and services for a given duration of 
labor? Will the enlarged quantity of possible return for 
the tenth hour's work serve as a stimulus to make him in- 
crease his time ? Or will the larger product which he has 
obtained from earlier hours so appease the intensity of his 
desires that he will stop at the eighth or seventh hour ? 
Which will prove the stronger force, the increase of the 
amount to be obtained, which makes additional labor seem 
more remunerative, or the increased amount of comfort 
already in his possession, which makes it seem less so ? 

The answer to this question will depend largely upon 
the kind of use which he makes of his wages. Assume 
that a laborer spends part of his earnings for food, part 
for comforts, part for luxuries, and part for social advance- 

' Direct sacrifice means pain ; indirect means loss of pleasure. Patten 
has developed some of the bearings of the difference between the two in 
an interesting manner ; but in our elementary treatment of the subject it 
seems hardly worth while to distinguish them. 



324 WAGES. 

ment. While Weber's law, that increased consumption 
is attended with diminished satisfaction (§ 92), perhaps 
applies in some measure to all of these things, the rapid- 
ity of the diminution is very different in the four cases. 
It is most marked in connection with food. Hunger is 
the most exacting of wants ; but when hunger is satisfied, 
the enjoyment connected with additional expenditures for 
eating rapidly diminishes, and the point of satiety may 
soon be reached. In the case of comforts like clothing, 
fuel, or shelter, the first want is not so imperative as that 
of hunger ; but the utility of added supplies of these things 
does not diminish so rapidly as in the case of food» 
While two suits of clothes do not represent twice as much 
utility to the wearer as one suit of clothes, the gain in 
enjoyment from their possession is relatively greater than 
that which results from eating double the accustomed 
number of meals. In the case of luxuries the first neces- 
sity is much less than that for food or clothing ; but when 
people have once begun to spend money on luxuries they 
can go on for a long time before they find themselves 
even approximately satiated. Expenditures for social 
advancement are not a necessity at all, but they are 
accompanied with almost undiminished enjoyment as 
their amount increases. 

§ 358. Suppose that a laborer under old conditions, 
working nine hours a day, spends the product of five 
hours' labor on food, that of three hours' labor on com- 
forts, and that of one hour's labor on luxuries ; and that 
by some industrial change his purchasing power in all 
these lines is doubled. What will happen ? He will 
quite certainly reduce the time devoted to the produc- 
tion of means of purchasing food. He can get more food 
by three hours' labor than he previously got by five ; and 
this so far satisfies his hunger that the promise of in- 
creased supplies from the fourth and fifth hour does not 
constitute a motive to work for that purpose. The time 



EN GETS LAW. 325 

devoted to the acquisition of comforts is not so certain to 
diminish. Not improbably it will remain nearly station- 
ary. If he continues to work three hours for fuel, cloth- 
ing, and house-rent, it will show that as the amount of 
these things has doubled, the intensity of enjoyment from 
additional supplies has halved — a probable enough result. 
The labor-time devoted to securing luxuries is likely to 
increase, because the increased amount of commodities 
which he can buy gives a large enjoyment with which the 
possession of other luxuries hardly interferes. What is 
true of luxuries is even more conspicuously true of means 
of social advancement. The more of these a man can get 
for any given time of labor, the more will he try to secure 
them independently of the amount he already possesses. 
We are thus likely to see a redistribution of hours some- 
what as follows : 

Old Conditions. New Conditions. 

Food 5 3 

Comforts 3 3 

Luxuries I 2 

Ambitions o i 

§ 359. This is not mere theory. It is verified by two 
independent lines of observation : 

1. The Prussian statistician, Dr. Engel, has developed 
the fact that the greater the wages a group of laborers re- 
ceives, the smaller will be the percentage of those wages 
which is spent for food. This generalization, known as 
Engel's Law, has been confirmed by investigations in a 
great many different countries, and has been supplemented 
by observation as to other groups of expenditure corre- 
sponding to the view just stated. 

2. It has also been noted that an increase in the volume 
of food products, while population remains unchanged, 
produces a fall in price more than corresponding to the 
increase of supply, so that the aggregate payment for such 
products by the consumers tends to diminish. This in- 



326 WAGES. 

dicates that consumers, when they can get a larger amount 
of food for the same amount of labor, tend to reduce the 
hours devoted to the work of securing food supplies. On 
the other hand, in most manufactured articles, which 
are matters of comfort or luxury, an increase in quantity 
produced is accompanied by a fall in price less than cor- 
responding to the increase in supply, so that the aggre- 
gate payment for such products by the consumer tends to 
increase. This shows that consumers, when they are en- 
abled to get a larger amount of manufactured products 
for the same amount of labor, so increase their consump- 
tion as to devote more labor instead of less to procuring 
things of this kind. 

This result is even more conspicuously seen when we 
come to luxuries like travel. A moderate reduction in 
price has been sufficient to cause a great increase in the 
use of transportation agencies, and to make the total 
amount paid for their services much larger than it was a 
few years ago. When the invention of the railroad en- 
abled one man to do work which formerly required a 
hundred or a thousand hands, it was supposed that the 
demand for labor in moving goods and passengers would 
be greatly diminished. But the railroad system employs 
far more laborers in proportion to the population than 
were employed on roads in the old days ; and this proves 
that the people as a whole spends a larger part of its 
income for transportation at low rates than it ever did at 
high rates.' 

' These conditions are illustrated in the differing forms of the demand 
curve (§ 91) for different articles. In the case of necessities, or things 
which are regarded as necessities, a change in price is accompanied by less 
than the proportionate change in quantity consumed. The demand curve 
in these cases approaches more nearly to a horizontal line. Especially is 
this true of an article like tobacco, so distinct from others in its character 
that nothing else can be substituted for it. On the other hand, with things 
which are not popularly regarded as necessities, a change in price is accom- 
panied by a more than proportionate change in quantity demanded, and 



REDUCTION OF HOURS. 327 

§ 360. We have thus far assumed the hours of labor to 
remain unchanged while the use made of the earnings of 
those hours was redistributed. But it will generally hap- 
pen that any increase of real wages, like that which has 
been described, is attended with some reduction in the 
hours of labor. 

There are two different causes, operating on different 
classes of laborers, which combine to produce this effect. 
The low-grade laborer who cares much for food and drink 
and comparatively little for other things, when he finds 
himself able to get his accustomed living in fewer hours 
is strongly tempted to reduce his working time ; or if he 
continues to work as many hours as before, he reduces 
speed in such a way as to have virtually the same effect 
on the industrial community. Until his consumption has 
become diversified and his ambition developed, the mo- 
tives for reducing his labor are stronger than those for 
increasing his earnings. On the other hand, the high- 
grade laborer, though anxious to increase his consump- 
tion, finds that time is necessary for the enjoyment of the 
new opportunities of diversified consumption which pro- 
gress has placed within his reach. The long hours of 
labor interfere with the enjoyment of the results of that 
labor. He sets a limit to his working day, not so much 
on account of the direct pain of labor as on account of the 
indirect sacrifices connected with its long continuance. 
He may try to combine both the means and the oppor- 
tunity for enjoyment by reducing hours and increasing his 
speed — in which case the reduction of the working day is 
more apparent than real. 

§ 361. But will not the progress of those who wish to 
shorten their hours or increase their enjoyments be de- 

the demand curve approaches more nearly to the vertical line. At high 
prices the demand will be trifling ; at low prices it will be many times 
greater. Commodities of this kind are said to be sensitive ; those of the 
former class are said to be insensitive. 



328 WAGES. 

feated by the less intelligent laborers, who go on irration- 
ally increasing their numbers ? Will not the whole vantage 
ground be lost in the next generation, when a larger popu- 
lation is competing for a limited supply of food products 
and disregarding opportunities for diversified enjoyment? 
Is not the gain to the laboring classes in its nature a tem- 
porary one, which will be destroj^ed by increase of num- 
bers on the part of the less intelligent members of the 
class? In some lines of production it will. In these lines 
the competitive system results in having our work done by 
a large number of low-grade laborers, instead of by a rela- 
tively small number of high-grade laborers. The ready- 
made clothing trade in our cities furnishes perhaps the 
most conspicuous instance. It is served by people who 
are underpaid, underfed, and undersupplied with every- 
thing which contributes to civilized life. The eflort to 
realize economy of production has in such cases led to the 
employment of cheap labor in the bad sense — of labor 
which is cheap because it does little, and which receives 
correspondingly little. 

§ 362. But while low grade labor is the cheapest labor 
in some employments, it is not cheap in others. To en- 
able a man to do hard work he must be reasonably well 
fed. The economy of increased power overbalances any 
apparent loss from increased consumption. Even where 
work requires physical strength only, the man who re- 
ceives low wages per day is so much less efficient that 
his labor may be very costly per unit of product. In em- 
ployments which require mental ability as well as physical 
strength, the inadequacy of the so-called cheap labor, and 
its real dearness when measured on the basis of work 
done, becomes even more conspicuously apparent. The 
brain worker, to do his work properly, must have not 
merely the necessary amount of food and shelter and 
fuel, but the necessary amount of comfort and travel and 



ECONOMY OF CONSUMPTION. 329 

education to keep the brain in working order.' A surgeon 
or a lawyer who earns only one dollar a day is a very bad 
man to employ. The cheap laborer cannot compete with 
the dear laborer in lines requiring special strength or 
special skill. 

§363. Different men require different feeding; differ- 
ent trades require different men. If we go into a machine 
shop where many steam-engines are built, we find some 
large ones and some small ones. The small ones burn 
little fuel, but they also furnish very little power. The 
large ones burn ten or one hundred times the amount 
of fuel, and require correspondingly greater care and ex- 
penditure in every direction ; but the difference in work 
done by large engines is such that, in those lines where 
they can be used, the apparent waste represents a true 
economy. So it is in the diversified industries of modern 
hfe. There are some men whose maximum efficiency per 
unit of food is obtained with small consumption and 
small output. These go into the lines requiring neither 
exceptional strength nor exceptional skill, and remain 
poor because the best commercial economy in such lines 
is obtained by a combination of low output and low 
consumption. There are others who require for their 
maximum efficiency a greater amount of food and a con- 
siderable diversity of enjoyment. These go into lines 
where the maximum efficiency is obtained by moderate 
but not immoderate consumption. Finally, we have a 
smaller number of men in yet higher walks of industry, 
whose economy is like that of the engines of the Liica?iia ; 
whose power can be obtained only by an enormous con- 
sumption of the products of others, past and present, but 

^ A large manufacturing concern, within the author's knowledge, offered 
to defray half the expenses of a visit to the Chicago Exposition for any of 
its foremen who would make the trip, believing that the increased value of 
their services to the concern would make the investment a paying one. 



\/-{\' 



330 WAGES. 

is, if properly directed, capable of rendering services more 
than proportionate to this consumption. 

§ 364, It is in this differentiation of employment that 
we are to seek the cause of poverty. People will have 
small earnings per day if they are so constituted that 
their maximum service in the community is obtained 
under conditions analogous to those of the small steam- 
engine. The multiplication of numbers which is charac- 
teristic of laborers of this grade drives the price of their 
services so low that it becomes impossible for nrien with a 
higher standard of living to compete with them in doing 
work which requires no special qualifications, either physi- 
cal or mental. The high-grade man who competes with 
an increasing number of low-grade men finds himself 
forced to the alternative of rising or dying. The compe- 
tition of those who multiply their numbers instead of 
shortening their hours or diversifying their consumption, 
drives the higher class of laborers out of some things and 
up into others. The men thus driven out cannot always 
maintain themselves in any higher grade of employment, 
and from this fact there results a great deal of hardship 
to those upon whom the changed conditions come when 
they are advanced in years ; but, on the whole, a sur- 
prisingly large number of the workmen who appear to 
suffer most from the competition of cheap labor are 
forced upward in spite of themselves, — forced to do a 
higher grade of work and to become richer and stronger 
than they could have hoped to be under the old condi- 
tions. The day-laborers in the United States have always 
feared and tried to obstruct the immigration of men whose 
habits of living were lower than their own, and whose in- 
flux would apparently take the bread out of the mouths 
of those who had previously done the cheapest grades of 
work. But there can be no doubt that the successive 
waves of immigration have improved rather than debased 
the condition of those with whom they came into compe- 



INDUSTRIAL GROUPS. 33 1 

tition. The Irishman in 1830 forced the American up; 
the Itahan and the Canadian have forced the Irishman 
up. The cheapening of the lowest grade of product, 
while it has operated as a disadvantage to those who 
compete in producing it, has served as an advantage to 
every consumer, and has made all those in the higher 
industrial groups better off from being relieved from the 
necessity of doing the work which could more economi- 
cally be done by cheap labor and poor men. 

Each group of laborers contributes to the supply of 
one particular kind of goods or services, and to the de- 
mand for goods and services of many other kinds. Every 
laborer who adds himself to one of these groups increases 
the supply and lowers the price in the line which he 
chooses. The greater the number of men in a group, the 
smaller will be the price of their services, and the larger 
the amounts which they have to pay for services rendered 
by men in other groups. An addition to the numbers of 
any given group makes life harder for those within its 
pale and easier for those without it. 

§ 365. Many men find themselves bound to a certain 
group by a custom or habit which they cannot override, 
or by special tastes which are the result of such habit. 
Others are free to choose their line of work as they please. 
With some reservations, they will choose the line where 
they think they can make the most money per year. A 
man of given physical and mental traits will try to adopt 
the business where those traits are most efficient — where 
the value due to their possession outweighs the cost of 
their maintenance. But if too many men go into the 
same group, some must go to the wall. If a profession is 
overcrowded, this fact reduces the amount which its mem- 
bers can earn, until there comes a time when some are 
forced into other trades where there is no such over- 
crowding. The differences of wages in different employ- 
ments are not due to differences in the pleasure or pain 



I 



332 WAGES. 

in the work, except so far as this pleasure or pain in- 
creases or diminishes the number of those who enter the 
field. They are due to the reciprocal demand of different 
groups for one another's products or services/ The rela- 
tive prices paid for the products of different groups must 
be such as to secure a grade of workers within each group 
which can give the required product at the minimum of 
waste to society. 

§ 366. While the characteristics of each individual are 
the chief factor in determining to which of these groups 
he shall belong, there are always some producers who 
stand on the verge between a lower and a higher group, 
and who are drafted to the one or the other by slight 
changes in the public demand. If the majority of men 
and women throughout the community are intelligent in 
their consumption, spending a relatively small proportion 
of their money for the bare necessaries of life and a large 
proportion for comforts and enjoyments, of higher as 
well as lower grades, we can have a large number of pro- 
ducers engaged in furnishing these enjoyments without 
driving their remuneration below the necessary minimum. 
In this way the education of the community in diversified 
consumption becomes of the highest importance to all 
classes in society. The qualities of an individual man 
will determine to a great extent whether he is to be rich 
or poor ; but the general standard of consumption of the 

^ Down to the time of Mill it was generally said that the price of articles 
tended to conform to their labor cost. Mill showed that in international 
trade this process was reversed ; that the remuneration of the producers of 
goods for the export trade of different nations was determined by their 
"reciprocal demand " for one another's products. Cairnes extended this 
theory of reciprocal demand to explain the relative remuneration of men of 
different social antecedents — " non-competing groups." About 1870 Wal- 
ras, Jevons, and Menger, working almost simultaneously and quite inde- 
pendently, showed that what Mill had treated as an exception was really a 
rule. "I hold labor to be essentially variable," says Jevons, ''so that its 
value must be determined by the value of the produce, not the value of the 
produce by that of the labor." 



EFFECTS OF LUXURY. 333 

community will be the dominant factor in determining 
how large a proportion of the community shall be rich or 
poor. If the bulk of the people live on the minimum of 
cheap food, multiply or at any rate maintain their numbers 
as long as such cheap food is forthcoming, and spend com- 
paratively little for comforts and luxuries, we shall find that 
most of the labor of such a community is employed in ob- 
taining subsistence for the masses. Under such circum- 
stances the proportion of low grade labor will probably be 
very great. If, however, a large part of the community 
has been educated to demand something besides cheap 
food and to exercise self-restraint in the multiplication of 
numbers until it is possible to provide a high standard of 
comfort, we shall have a relatively smaller demand for 
food and a relatively larger demand for those comforts 
and luxuries which are the product of higher intelligence 
and require a higher rate of pay in order to enable the 
producer to furnish them to advantage. In this way, any 
increase in intelligence of consumption on the part of the 
masses increases the average rate of real wages, by making 
it possible for a larger proportion of the producers to live 
in employments where the conditions of economical pro- 
duction are favorable to comfort, education, and wealth, 
rather than to poverty and numerical increase. 

§ 367. This must not be understood as involving indis- 
criminate commendation of luxury. If luxury lays many 
men and many things under contribution for the enjoy- 
ment of one man only, it is bad for the community. If it 
leads one man to monopolize the product of a larger 
amount of land than is necessary for his own support, it 
prevents others from getting food. If it causes an un- 
necessary amount of labor to be spent for one man's 
enjoyment, it prevents the labor from furnishing means 
of enjoyment to many others. If, as frequently happens, 
the product of this labor harms the efficiency of the man 
who enjoys it, it involves an additional source of weak- 



334 WAGES. 

ness to the community. We have seen the fallacy of 
the attempt to excuse such luxury on the pretext that it 
gives employment to labor. But in their well-grounded 
protest against selfish excesses of luxury, and against the 
excuses made to palliate them, some economists have 
gone too far in discountenancing all unnecessary expendi- 
ture for personal comfort. " The Puritans objected to 
bear-baiting, not because it gave pain to the bear, but be- 
cause it gave pleasure to the spectators." This judgment 
is as unwarranted as the other. The intellectual progress 
connected with using things that are not necessary is quite 
as important to the community as the industrial progress 
connected with producing things that are. The distinc- 
tion between productive and unproductive consumption is 
often drawn in such a way as to emphasize purely mate- 
rial advances and ignore other things which are quite 
as essential. The lack of intelligent enjoyment, in the 
Anglo-Saxon race at any rate, involves more pressing 
danger than the lack of readiness to save capital. If a 
man spends his money for luxuries which do no harm, 
and whose production does not involve a waste of land or 
labor disproportionate to the enjoyment which they fur- 
nish to him and to others, he is presumably helping rather 
than hindering the progress of the community at large. 

§ 368. There are many schemes of social reform, whose 
promoters expect to lessen poverty by increasing the 
laborers' intelligence in production, but whose actual 
promise of good to society is far more dependent upon 
their influence on intelligence in consumption. Popular 
education may serve as a type. This has some effect in 
making a laborer more skilful and in enabling him to con- 
tribute a larger share to the public income. But it does 
not directly promote the man's earning power to a degree 
commensurate with the time spent by the schoolboy or 
the money spent by the taxpayer. The more advanced 
the education, the greater is the force of this complaint. 



DEMAND FOR HIGH-GRADE LABOR. 335 

A high school course is most useful to those who reach 
the higher walks of life ; but all men cannot reach these 
walks without overcrowding them : and in the lower 
spheres of industry it often seems to do the recipient 
little good. The greatest gain from public education lies 
in the fact that a people which grows up with wide views 
of life, develops wider demands for consumption. Instead 
of a large population chiefly engaged in supplying itself 
with a bare living, we have a somewhat smaller total 
population, demanding and receiving more complex ser- 
vices which their education has led them to regard as 
indispensable, and in whose purveyance the high grade 
laborer has an advantage over his low grade competitor. 
Somewhat the same thing can be said of the grounds for 
regulating the liquor traffic. The waste of productive 
power due to indulgence in drink is only a part, and per- 
haps not the largest part, of the evils chargeable to drunk- 
enness. Where the passion for excess in drink stands in 
the way of intelligent enjoyment, it promotes poverty, 
not only by making the drinking men poor producers, 
but by making the public a poor consumer. 



CHAPTER XI. 

MACHINERY AND LABOR. 

Alleged Displacement and Degradation of Labor — Factory Acts — Labor 
Organizations — Old and New Methods — Compulsory Arbitration — 
The Living Wage. 

W. S. Jevons . " The State in Relation to Labor." London, 1882. 

J. A, Hobson : " The Evolution of Modern Capitalism." London, 1894. 

G. V, Schulze-Gaevernitz: " Der Grossbetrieb." Leipzig, 1892. 

The older motives and ideas of English Trades-Unions are well presented 
by G. Howell, " Conflicts of Capital and Labor," 2d ed. London, 1890. 
The views of the new unionism are given by Sidney and Beatrice Webb, 
" History of Trade Unionism," London, 1894. There is no correspond 
ingly complete history of American labor movements ; perhaps the most 
available is R. T. Ely, " The Labor Movement in America," New York, 
1886. 

§ 369. We have thus far assumed that improvements 
in the efficiency of labor were not accompanied by any 
radical alteration in the industrial system ; that the con- 
ditions of employment remained substantially the same, 
while the power of the individual workman was increased. 
But in point of fact, the greater part of the increase in 
the efficiency of modern labor has been connected with 
the use of modern machinery and improved productive 
methods which are under the control of the employer and 
not of the laborer. Some people who admit that the 
laborer gains by the increase of his own powers are dis- 
posed to doubt whether a similar gain is possible for the 
laborer when the means of increased production are held 
in the hands of the capitahst. Especially doubtful does 

336 



THE FACTORY SYSTEM. 337 

the case seem in those large industries where combination 
has made the greatest progress, and where the protection 
which the workman receives from the competition of 
different capitalists is apparently reduced to a minimum. 
§ 370. There are three evils which the opponents of 
private capital charge against machinery, as now managed 
and operated : 

1. That it displaces a large amount of human labor, 
thus taking income away from employees and giving it to 
employers. 

2. That when it does not actually drive human labor 
out of use, it employs it in circumstances unfavorable to 
efficiency, health, and morals. 

3. That under, the best conditions it deprives the work- 
man of independence, making him a specialized machine 
instead of a broad-minded man. 

§ 371. The first charge, in its wider shape, is obviously 
belied by the facts. Machinery has not displaced labor. 
On the contrary, there has been a most conspicuous in- 
crease of employment in those lines where improvements 
in machinery have been greatest. The number of persons 
engaged in manufacturing and transportation to-day bears 
a far larger proportion to those engaged in agriculture 
than was the case two or three generations ago. The 
urban population makes more use of machinery than the 
rural population ; and it is a conspicuous fact that our 
cities have grown faster than the country as a whole.. 
Whatever else machinery may have done, it certainly has 
not kept labor out of mechanical industries. 

Nowhere have modern methods been more strikingly 
exemplified than in transportation industries. By the use 
of the railroad a single man is enabled to do work which 
formerly would have been hardly within the capacity of a 
thousand men. On this very account the introduction of 
railroads was regarded with distrust by large classes of the 
community. It was thought that teamsters, hostlers, and 



338 MACHINERY AND LABOR. 

innkeepers would be thrown out of employment, and that 
there would be no work left for them to do. But it has 
turned out that the development of the railroad has 
given additional work to the very classes which it was 
expected to antagonize. While the efficiency of human 
labor in transportation has increased a thousand-fold, the 
volume of goods and passengers transported has increased 
much more than this. The services of collection and 
delivery of freight at stations now employ as many men 
and horses as were engaged in the whole movement of 
freight a century ago. The entertainment of modern 
travellers affords occupation to a larger number of inn- 
keepers than were supported by the few passengers who 
ventured to take long journeys in ancient times. The 
cheapening of transportation attendant upon the use of 
improved appliances has called forth a development of 
travel and of freight shipment more than proportionate 
to the increased effidency of service. The aggregate 
demand for labor in these lines has become greater instead 
of less. 

Nor is this experience with railroad travel an isolated 
or accidental one. It is characteristic of the effects of 
modern mechanical processes, wherever they have been 
applied on a large scale. The work o.f machinery is 
generally of such a kind that it can be made profitable 
only by extensive public use. If a community can buy 
but ten pairs of shoes in a year, it will be more economi- 
cal to have shoes made by hand, no matter what machinery 
may be invented. In order to obtain the advantage of 
the best modern processes of manufacture, we must make 
a hundred thousand pairs a year. The economy of the 
introduction of a machine consists, not in making the old 
product at less expense and with less labor, but in making 
a much larger product with the same labor. What is 
called labor-saving machinery is in fact not labor-saving, 
but product-making. It can only become profitable by 



INSTANCES OF INCREASED WAGES. 339 

meeting the wants of the community as a whole, and not 
those of a few rich men. 

§ 372. Some detailed results of improvement in ma- 
chinery from 1840 to 1883 are well illustrated by figures 
which Atkinson has collected from cotton mills. For 
purposes of comparison he chose two mills which had 
been in operation throughout this period, which em- 
ployed substantially the same number of operatives in 
1883 that they did in 1840, and which had not changed 
the valuation of their capital. During the period in ques- 
tion, the output of these mills had almost exactly trebled. 
This increase had made it necessary to reduce the price 
charged for the services in manufacturing {i. e., the margin 
between selling price and cost of material) from about 
three cents per yard in 1840 to about one cent and a half 
in 1883. The wages paid had fallen from 1.82 cents per 
yard in 1840 to 1.08 cents in 1883; but the profits had 
fallen from 1.18 cents in 1840 to 0.43 cents in 1883. The 
share of the laborers in the total product had risen from 
less than 61 per cent in the former case to more than 68 
per cent in the latter, in the face of a decided reduction 
in the hours of labor, and an even more decided increase 
in the number of looms and spindles per operative. The 
actual profits on the total capital had remained about the 
same, but the wages per operative per year had increased 
64 per cent. Other instances like this, which have been 
collected from different lines of business, seem to indicate 
that under the modern industrial system the*^ is a ten- 
dency toward increase of wages and relative diminution ^•^^ 
of profits. 

To this optimistic view, that machinery benefits the 
laborer rather than the employer, there are certain objec- 
tions which must be carefully examined. 

§ 373- The increase of large fortunes on the part of the 
owners of capital while so many of their operatives have 
accumulated little or nothing is held by many to prove 



340 MACHINERY AND LABOR. 

that the capitalists have been the chief gainers in modern 
industrial progress. The growing contrast between wealth 
and poverty seems to indicate that the rich are growing 
richer and the poor poorer. In a new community, few 
are very rich, but few are in danger of starvation. As the 
community becomes older, the disparity between the 
richest and the poorest becomes greater with each suc- 
ceeding year. This fact of itself is thought sufificient to 
prove that progress increases the advantages of capital as 
compared with those of labor. 

This reasoning is inconclusive. Differences of accumu- 
lated wealth of different members of the community prove 
nothing as to ratios of income of different classes. 

The disparity in the accumulations of different men is 
K ' ' likely to become more marked as the amount of wealth in 
any community grows larger. There is always a number 
of people who stand at the zero point in the matter of 
accumulation. Some men gamble and get rid of their 
property at once ; some men drink and get rid of it 
almost as speedily. Some without either gambling or 
drinking are so shiftless that they refuse to work as long 
as they have a dollar in their pockets. Some, again, are 
unfortunate, through no fault of their own, and fall into 
the fate of the shiftless unless relieved by charity. If 
property were evenly divided to-day, there would soon be 
some men who had none and others who had a great deal. 
The successful gambler and the saloon keeper will benefit 
by the losses of their victims ; the industrious or fortunate 
man will find himself gradually drawing ahead of the shift- 
less or unfortunate. The more capital there is in the com- 
^/ munity the greater these differences are sure to become. 
With the increasing wealth of modern nations there has 
inevitably been an increasing disparity between the accu- 
mulations of those who have most and of those who have 
least. 

But this does not always represent a difference in in- 



ACCUMULATIONS AND INCOME. 341 

come. The income of the man who has saved nothing 
may be larger than that of the man who has saved a hun- 
dred or a thousand dollars a year. Nor does it represent 
a difference in enjoyment. The enjoyment of different 
classes and different individuals in the community is 
measured by their expenditure, not by their accumula- 
tions. The most careful calculations show, that side by 
side with the increase of accumulations, and partly as its 
direct consequence, the proportion of enjoyment which 
goes to labor is becoming larger, and the proportion which 
accrues to capital relatively smaller. Just as increased 
numbers of laborers mean increased competition for em- 
ployment, forcing the position of the laboring classes 
downward, so increased accumulations of capital mean 
increased competition for the services of the laborers, forc- 
ing the relative income of the capitalists downward and 
that of the laborers upward. It is in large measure be- 
cause of the enormous investments of capital and the 
resulting keenness of competition among employers, that 
the proportion of the public income going to the laborers 
has steadily increased.' 

' Several attempts have been made to measure the relative shares of the 
annual product received by capitalists and laborers at different times. Rae 
has made an estimate for England on the basis of figures furnished by 
Gregory King for 168S and by Dudley Baxter for 1867. Using the term 
" working class " somewhat narrowly, so as to exclude those receiving salaries 
or fees, he calculates that in 1688 74 per cent of the population belonged to 
the working class, and earned collectively 26 per cent of the entire income 
of the country ; while in 1867 somewhat less than 80 per cent belonged to the 
working class and earned collectively 40 per cent of the income of the com- 
munity. Atkinson has made a similar estimate for the United States in 1880 
in which he has included with the working class the salary-receivers as well 
as the wage-receivers. Taking his figures from the United States census of 
1880, he estimates the value of the commercial product of the country at 
$10,000,000,000, while the amount paid in wages and salaries of every kind 
was $9,000,000,000. As 1880 was very nearly a normal year, not conspicu- 
ously marked by either inflation or depression, and as the census of 1880 was 
better managed than any other in the history of the United States, he be- 
lieves that this represented very nearly the ratio of wages to profits. The 



342 MACHINERY AND LABOR. 

§ 374. It is urged as proof of the diminishing share of 
labor in the industrial product, that modern methods 
cause more time to elapse between the rendering of labor 
and the receipt of the product ; that while the rate of 
profit has doubtless fallen, this fall is not proportionate to 
the increase in the average duration of the process ; and 
that the ratio of total profits to total wages must there- 
fore have increased. 

To this view it may be answered, first, that the rate of 
profit (as distinct from the rate of interest) has fallen most 
conspicuously in large industries with much fixed capital. 
Goods are produced and sold on far narrower margins. A 
few large employers can make more accurate calculations 
of cost than a number of small ones ; and the very scale 
on which the work is done, while it often seems to pre- 
clude competition, really gives publicity to the facts with 
regard to production and sale in a way to ensure more 
fully both to laborers and consumers the benefit of the 
one-price system. It may be added in the second place, 
that instances of mistaken investment in machinery which 
gives no profit at all, tend to reduce the gains of the capi- 
talist classes to a far greater degree than any one would 
assume who did not make the calculation in detail. 

§ 375. Another objection to the view that the benefit 
of machinery has gone chiefly to the laboring classes is 
based on the fact that the hours of labor have not been 
reduced in proportion to the increased efficiency which 

small proportion of profits under this estimate has excited general surprise, 
and Hawley, in his criticism of Atkinson's methods, points out that the total 
current product of the year 1880 should include the value of services ren- 
dered, as well as goods consumed. Adding $2,000,000,000 on this ground, 
Hawley makes the total sum to be divided between labor and capital $12,- 
000,000,000, and the proportion of wages to profits 3 to i instead of g to i, — 
a much more plausible result. But all estimates of this kind, however care- 
fully made, are beset with difficulties, both theoretical and practical. For 
the product which is distributed between laborers and capitalists is to be 
measured as income, not as capital ; it is a flow, and not a fund ; and this 
fact enormously enhances the difficulties of observing and measuring it. 



MARX'S ARGUMENT. 343 

the new mechanical methods have given. Marx and his 
followers make a great deal of this argument. They say 
that the inventions and appliances of the nineteenth cen- 
tury have increased the power of labor in every line, and 
that its average productiveness to-day can hardly be less 
than three times what it was in 1800. Therefore, if the 
laborer at the beginning of the present century worked 
twelve hours a day to obtain a bare living, he ought now 
to be able to secure the same result in four hours. If, in 
spite of improvements, he continues to work ten or eleven 
hours for starvation wages, it shows that the result of six 
or seven hours' time has been quietly appropriated by the 
capitalist. 

The answer to this argument has been indicated in a 
previous chapter. When a larger amount of products is 
placed at the disposal of the community, different classes 
of laborers utilize that increase in three or four distinct 
ways. Some employ it in shortening their hours of labor, 
some in extending their consumption of comforts and 
luxuries or their control of industrial enterprises. Progress 
has been made in all these directions. Some laborers 
have become capitalists. Many more have increased their 
consumption of comforts and luxuries. The hours of 
labor have been considerably shortened. But a large 
class of laborers has been content to increase its numbers, 
and has fallen into those lines of industry where the maxi- 
mum economy is obtained by employing a large number 
of people for a small daily wage. The effect of machinery 
on the laboring classes as a whole is not to be judged by 
its effect on those sections of the laboring class which, 
either by fault or misfortune, have placed themselves in 
the position to obtain a minimum benefit, either as pro- 
ducers or as consumers. 

§ 376. Another argument of those who believe that 
machinery has hurt the laborer is based on the facts 
observed in every commercial crisis. The most con- 



344 MACHINERY AND LABOR. 

spicuous, if not the most serious, distress connected with 
hard times is found in those lines where there has been 
great dupKcation of machinery ; Hnes where the machines 
and the laborers together are far more than able to supply 
the popular demand for products and services at rates 
which will keep the workman and his family alive. This 
criticism is not to be set aside like the two already noticed. 
The suffering from this source is terribly severe. The 
best that can be said is, that the evil is due, not so much 
to the introduction of machinery as to variations in the 
rate of its introduction, and that it is one which, after a 
comparatively short period, works its own cure. 

§ 377. Let us examine the nature of the process by 
which machinery leads to over-production and throws 
men out of employment. 

While a new machine is in process of construction, there 
is a large temporary demand for labor in making it. The 
capitalist is spending money which he hopes gradually to 
recoup by the sale of the products or services of this ma- 
chine. Until it is finished it causes an increased demand 
for labor in the coal and iron trades, which are chiefly 
concerned with the production of machinery ; after it is 
finished, it creates a permanently increased supply of 
consumable products or services in its own particular line 
of work. The capitalist expects that a moderate reduc- 
tion in the price of those products will cause an increase 
in their consumption sufficient to enable him to sell 
them. 

If as a result of a commercial panic there is a sudden 
cessation of investment in new machinery, we have a 
stoppage of demand for labor in the coal and iron trades, 
while the supply of consumable products of machinery 
remains unimpaired. The loss of employment in the 
trades concerned with the production of machinery oper- 
ates to check consumption, since these laborers — no small 
percentage of the whole people — find themselves without 



IRREGULARITY OF EMPLOYMENT. 345 

money to spend. The manufacturers are left with a large 
surplus of unsalable products on their hands. In order to 
avoid an accumulation of unsold stock they are obliged 
to limit the output of their mills, and thus the reduction 
of employment extends far beyond the sphere of the 
trades that were first affected and causes great suffering 
to laborers in almost every line of industry. 

§ 378. This suffering constitutes perhaps the most seri- 
ous ground for the indictments of the socialists against 
the capitalistic system of production. It is not, however, 
chargeable to machinery ; nor even to the private owner- 
ship of machinery, for we find similar irregularities of 
employment in industrial enterprises managed by govern- 
ment. It is due to variations in the rate at which 
machinery is introduced ; variations stimulated some- 
times by inflation in the currency, sometimes by unwise 
tariff legislation, sometimes by the abuse of commercial 
credit and the reaction which inevitably follows it. Nor is 
the position of the laborers permanently depressed by these 
misfortunes. The chief ultimate loss falls on the capitalists. 
Fixed capital is almost always permanently reduced in 
value by the readjustments of a commercial crisis, while 
wages return to their old figure in the next recurring 
period of prosperity. 

§ 379. The second great charge made (§ 370) against the 
factory system is that it displaces a higher grade of labor by 
a lower grade ; sometimes substituting the work of women 
and children for that of men ; sometimes substituting work 
under conditions physically or morally unhealthful, for 
work under healthful conditions ; sometimes substituting 
specialized and mechanical work for diversified occupation 
which contributes to general intelligence. 

§ 380. In point of fact, the introduction of machinery has 
not been attended with an increase in the proportion of 
labor done by women and children, but with a diminution. 
If we wish to find the place where the largest amount of 



346 MACHINERY AND LABOR. 

work is done by the weaker members of society, we must 
look to the peoples whose civilization is least advanced. 
A much larger proportion of industrial work is done by 
women in the unprogressive parts of Europe, where mod- 
ern machinery is little known, than in those which have 
felt the fullest effects of economic progress. As we ex- 
amine .the changes in the United States from one decade 
to another, we find that successive censuses show an in- 
creasing proportion of men engaged in manufactures, a 
nearly stationary proportion of women, and an actually 
decreasing proportion of children. While there is proba- 
bly much more employment of women and children in 
factories than is desirable for the best interests of the com- 
munity, the facts which we have at command indicate 
that we are better off in this respect to-day than we have 
been in previous generations. 

§ 381. Those who hold the opposite view and think 
that the use of machinery increases the proportion of 
women's and children's labor, rely on two arguments to 
prove their position. In the first place, they say that the 
introduction of machinery dispenses with the necessity of 
physical strength, and enables the weaker members of the 
community to do many things which formerly required 
the direct attention of the stronger. This is true as far 
as it goes, but it is inconclusive. Machinery in its com- 
plicated forms may lessen the demand for physical 
strength, but it greatly increases the demand for responsi- 
bility in handling it. The races which are successful in 
dealing with machinery are those which have the mental 
and moral qualities that enable them to operate it with- 
out destruction. A lessened demand for strength which 
might increase the use of child labor is counterbalanced 
by an increasing demand for continuity of attention and 
intelligent care which makes such labor inapplicable. 

§ 382. Another argument of those who believe that the 
factory system has increased the employment of women 



UNHEALTHFUL EMPLOYMENT. 34/ 

is founded on the high rate of infant mortality which pre- 
vails in large cities. It is said that this points clearly to 
the employment of married women in factories when they 
should be attending to their children at home. This in- 
ference is not fairly warranted. The conditions of city 
life are so far adverse to the health of little children that 
we may expect to see a high infant death-rate in cities, 
whether the mother stays at home or goes out to work. 
In England, where the vital statistics are far more accu- 
rately kept than in this country, the largest percentage of 
infant mortality is seen in Liverpool, which among all the 
leading English cities is probably least devoted to manu- 
facturing. So far as the factory system has caused peo- 
ple to crowd in cities it may be held responsible for the 
increase of infant mortality ; but it is through the lack of 
air and sunlight that this effect seems to be produced, 
rather than through the employment of married women 
in factories. 

§ 383. The charge that factory labor is physically un- 
healthful is so vague as to be difficult to discuss. Some 
factory employments are of course injurious to health ; so 
are some home employments. If we wish to see labor in its 
most abject circumstances we must look, not to the large 
factory, but to those survivals of the earlier domestic sys- 
tem of industry which are exemplified in the tenement- 
house districts of New York or the East End of London. 
The crowding in factories with insufficient air space or 
bad ventilation is sometimes a great evil ; but the air 
space and ventilation of factories are as a rule indefinitely 
better than the air space and ventilation to which the 
operatives are elsewhere accustomed, " The trouble," 
says Colonel Wright in his monograph on the factory 
system of the United States, " is not in the air space of 
the factories but in that of the homes. The air of a cot- 
ton factory is better than that of a lecture room." The 
statistics of mortality in the various occupations are not 



348 ' MACHINERY AND LABOR. 

at all decisive as to the healthfulness or unhealthfulness 
of factory life. According to Colonel Wright's observa- 
tion, they " prove the one or the other conclusion, as the 
motive of the person using the statistics may indicate." 

§ 384. Nor are the moral results of the factory system 
as bad as those of the domestic system which it super- 
seded. The intemperance of manufacturing towns seems 
to be a result of town life rather than of manufacturing. 
It has been proved in France that drunkenness among 
factory operatives is less than among laborers of other 
kinds ; and it is believed by Colonel Wright that the same 
thing can be said of the United States. It is still clearer 
that the factory system does not promote prostitution. 
The small number of prostitutes coming from the ranks 
of factory operatives is most conspicuous in every inves- 
tigation of the subject. 

§ 385. "The great evils which became apparent during 
the early days of the factory system were simply the results 
of bringing together the labor which had become pauper- 
ized under the domestic system and in agricultural dis- 
tricts. The factory brought these evils to light ; and the 
employment of women and children became an offence in 
the eyes of the public, not because it was severer than 
under the old system, but because under the new the 
evils of such employment could be seen." When these 
things were brought to the notice of the public, measures 
were at once taken to remedy them, not as a rule by the 
workmen themselves but by sections of the public which 
now became cognizant for the first time of wrongs which 
had existed for centuries. The larger the factory, the 
more visible are the evils and the more effectively does it 
become possible to control them, either by law or by public 
opinion. The factory system has not created the abuses 
which are charged against it ; it has created the oppor- 
tunity of holding employers responsible for their preven- 
tion. This opportunity has been most effectively utilized 



FACTORY ACTS, 349 

in England, the birthplace of modern manufacturing; 
while of all the United States, Massachusetts, which was 
the first to establish factories, has done the most to 
regulate their methods and to improve the condition of 
their operatives. 

§ 386. Much has already been accomplished in these 
lines. The labor of very young children has been pro- 
hibited, and that of older ones restricted in such a way as 
to enable them to attend school. Female labor has been 
subjected to regulations which are at once effective and 
salutary. Even for adult men, the hours of employment 
have been decidedly reduced, to some degree by law and 
much more by public sentiment. Half a century ago, 
thirteen hours was not an uncommon working day for a 
factory operative. Now, eleven represents a maximum in 
progressive communities, while the average working time 
in such places is under rather than over ten hours.' 

An equally important branch of factory legislation 
deals with unhealthful methods of conducting business. 
It would be tedious to enumerate provisions made in the 
statutes of different states and countries, with regard to 
ventilation, protection from fire, and provision against 
various forms of accident to which those who use machin- 
ery are liable. Apart from any system of statutory enact- 
ments, much has been done by the enlightened self-interest 
of the factory owners. Manufacturers' mutual insurance 
companies (§ 431) have sought to reduce losses by avoid- 
ing all preventable causes of fire, and have succeeded to 
an astonishing degree. Associations for boiler inspection 
are able to use a vigilance which in most districts far sur- 
passes that which can be expected from the public ofificials, 
and have prevented much loss of life to the workmen, as 
well as loss of property to the employer. 

^ A fuller discussion of laws regulating the hours of labor, not as means 
to public health, but as efforts to reduce the labor supply and create em- 
ployment for those now out of work, will be found in ch. xiii. 



350 MACHINERY AND LABOR. 

§ 387. Meantime there has been a great change in the 
views which prevail with regard to employers' liability in 
the matter of accidents. The common-law doctrine on 
this subject was exceedingly unfavorable to the workman. 
It generally made him responsible for injuries which he 
suffered in the exercise of his trade. It was held that in 
accepting the employment he took the risks incident to 
it. A special hardship in this matter arose from the pro- 
vision that a workman could get no compensation for 
harm sustained through the negligence of a fellow work- 
man. The old doctrine appears to have assumed that the 
employee, and not the employer, was in a position to tell 
what was going on ; that the way to prevent carelessness 
was to hold the workman responsible for the results of 
such carelessness on the part of himself or his fellows. 
In the modern factory a policy of this kind does not put 
the responsibility where it belongs. In a very large class 
of accidents arising from defects of ways, works, or ma- 
chinery, the employer is usually in a better position than 
the workman to know what is wrong and to take effective 
measures to prevent accidents. Even in those cases where 
injuries are caused by the negligence of a fellow workman^ 
the organization of modern industry g^ves the employer 
power to prevent such casualties more effeeiively than 
the employee. There is a strong tendency to place in- 
creased responsibility on the owner of the works both for 
defects of his buildings or machinery and for negligence 
of his subordinates ; a tendency which has found most 
marked expression in the Employer's Liability Law of 
Great Britain. 

§ 388. The charge that the factory system tends to de- 
prive the laborer of independence, and reduce him to the 
position of a machine, is not so easily set aside. The sub- 
stitution of mechanical for intelligent labor is often a very 
serious evil in modern manufacturing. Not only are indi- 
vidual forms of acquired skill, like that of the hand-loom 



THE MODERN LABORER. 35 I 

weavers at the beginning of this century, made useless by 
the introduction of new machinery, but large classes of 
men who were most useful citizens in the past are being 
driven out of existence by the stress of modern competi- 
tion. The increasing efficiency connected with the division 
and organization of labor has crowded out those men who 
exercised a diversified industry. It is not merely the 
jack-of-all-trades, but the master of one trade, that finds 
it difficult to compete with the employees who subdivide 
his trade into a hundred different parts. The village black- 
smith finds his occupation gone when so large a part of 
his product can be made by machinery at one-tenth of 
the old cost. We have secured diversification of con- 
sumption through the cheapening of products, but it has 
been -obtained at the sacrifice of diversified industrial 
activity on the part of the men who make those products. 
It is undeniable that labor is becoming more and more 
specialized, and that many of the occupations of the 
modern laborer have a narrowing effect upon those who 
practise them. 

§ 389. Nevertheless we may safely deny that this change 
is causing an intellectual decline among the masses. The 
gain in opportunities for travel and for varied enjoyment 
has outweighed the loss in opportunity for changes of 
occupation. We may regret the disappearance of certain 
attractive qualities, as the frontiersman gives place to the 
farmer, the farmer to the craftsman, the craftsman to the 
modern workman. There is a progressive loss of inde- 
pendence and self-sufficiency, and sometimes of self- 
reliance. Yet, on the whole, we find that advancing 
civilization brings gains which more than make up for the 
losses. The agricultural people has more to make life 
worth living than 'the tribe of hunters. The craftsmen 
dwelling in cities have more variety than the purely 
agricultural peoples. The change from handicraft to 
manufacture, in spite of its attendant dangers, yields the 



ijryUM. 



352 MACHINERY AND LABOR. 

public a gain, not only in material wealth, but in breadth 
and variety of civilization. 

§ 390. This improvement in the material and intellectual 
condition of the laborers has not made the movements 
toward combination of labor any less active. In fact, it 
has probably tended to stimulate them. Just because the 
laborer has so many advantages as a consumer, he is 
often led to feel more keenly his lack of independence as 
a producer. Increased comfort is attended with increased 
ambition. Even if combinations of capital give relatively 
good wages, combinations of labor may seem necessary to 
insure the laborers against the loss of all industrial and 
social power. 

§ 391. There was probably a slender historical connec- 
tion between the remnants of the old trade gilds and the 
first trades-unions of modern times.' But the tie was an 
accidental and unimportant one. The modern organiza- 
tions differ in principle from their mediaeval predecessors. 
The gilds were really organizations of capital quite as 
much as of labor. They controlled what little machinery 
was used in the manufacturing processes of early days. 
They broke down not so much because other laborers 
competed with them, as because other capitalists had 
better methods by which they were prepared to serve the 
community cheaper. The modern union is distinctively 
a combination of labor and riot of capital. It is an out- 
growth of the factory system ; an effort to meet concen- 
tration of power on the part of employers by similar 
concentration on the part of the employed. 

§ 392. At the beginning of the present century the law 
and the public sentiment among the property-owning 
classes were both unfavorable to the organization of 
labor. This was conspicuously the case in England. To 
say that laborers were not allowed to combine in defence 
of their rights is to put the matter altogether too mildly. 

^ Brentano's evidence on this point seems conclusive. 



TRADES-UNIONS. 353 

The slightest attempt at concurrent action to increase the 
price of their services was visited by the severest penalties. 
As late as 1834, six Dorchester laborers were sent as con- 
victs to Botany Bay for the mere act of forming a labor 
organization which had not even asked for an advance of 
wages. But with the growth of democratic spirit and 
democratic power, a more liberal policy began to prevail.' 
Not the least important among the series of English fac- 
tory acts were those which gave increasing recognition of 
the right of laborers to combine, 

§ 393. The change in public sentiment toward trades- 
unions has not quite kept pace with the changes in the 
law. In the minds of a large section of the public, labor 
unions are chiefly associated with strikes. It is believed 
by many who ought to know better, that such organiza- 
tions exist for the purpose of striking, and that if the 
organizations were suppressed, industrial peace would be 
secured. 

The first of these ideas is a distorted one ; the second 
is wholly unfounded. Even in their severest days, com- 
bination laws did not prevent strikes. Where a number 
of operatives are bound together by a common feeling 
they will take united action for what they deem to be 
their rights, even if they have had no chance for previous 
agreement or discussion. The attempt to prevent such 
previous discussion tends to make the strike more violent 
by putting it wholly under the control of feeling and 
giving no place for reason among those who take part in 
it. Under such circumstances we shall have recklessness 
and terrorism, if not actual bloodshed or arson. Where 
all organization of labor is placed under the ban of the 
law, such unions as continue to exist in defiance of the 
law are forced to develop their worst sides. The recog- 

^ A similar change which took place in the United States was much less 
conspicuous, because combination laws in America had never been admin- 
istered in as severe a spirit as that which prevailed on the other side of the 

Atlantic. 
23 



354 MACHINERY AND LABOR. 

nition of the right of labor to combine has made a 
decided change for the better in trades-union pohcy. 
It has substituted open methods of warfare for secret 
ones. It has allowed the more cool-headed workman to 
take a prominent part in guiding his fellow-laborers in 
their conflicts with capital. It has tended to make strikes 
more rational, and therefore more dangerous to those who 
resist them. 

§ 394. A union whose primary object is conflict rarely 
has funds enough to carry its conflicts to a successful 
issue.' The stronger and better unions are organized for 
purposes of insurance and other forms of mutual benefit 
no less than for conflict. They are responsible bodies, 
prepared to make contracts with capital as well as to 
fight against it. It is the possession of this permanent 
organization and the control of the funds connected with 
it which make these unions such dangerous enemies in 
time of war. But this same permanence of organization 
renders them less ready to engage in conflicts without 
carefully computing the chance of bringing those conflicts 
to a successful issue. They have acquired a store of past 
experience both in victory and in defeat. They have in 
many instances become holders of considerable property 
of their own. They show the conservative spirit, not to 
say the exclusiveness, to which the possession of expe- 
rience and the ownership of property so often give rise. 
It is a constant complaint of the more radical agitators in 
England that the older trades-unionists have no sympathy 
with labor as a whole, but are interested only in the pros- 
perity of a small body of laborers. The same charge is 
made in the United States against the conduct of some 
of the organizations which represent skilled labor only. 
Many of the workmen who are most in need of help 
find as little sympathy from a high grade union as from a 

* The apparent exceptions in recent English experience have hardly 
lasted long enough to be quoted in disproof of this statement. 



THE NEW UNIONISM. 355 

landowner or a capitalist. Under such circumstances, a 
'' new unionism " has grown up, which seeks to advance 
the cause of all laborers, instead of that of the favored 
few. In England this movement numbers among its 
adherents nearly all of the most distinguished among the 
younger members of the labor party. In the United 
States, the ideas underlying this movement were set forth 
by the Knights of Labor, an organization which in the 
years 1885 and 1886 grew to almost unprecedented 
magnitude. The Knights of Labor were not organized 
according to trade, — though it might readily happen that 
all the members of one local assembly might be working 
in the same trade, — but according to locality. They were 
not occupied with advancing the interests of a particular 
class of laborers, except so far as the interest of that class 
was thought to be a part of the common interest of labor 
against capital. On the continent of Europe, where labor 
unions have been from the first largely under the dominion 
of socialistic ideas, the revolt against the exclusiveness of 
the older unions finds even more unquestioning sympathy 
than in England or America.* 

^ The labor movements on the continent of Europe are political rather 
than economic in their character. Their leaders are far more occupied with 
the overthrow of oligarchic institutions than with the improvement of indus- 
trial conditions. The " social democrat" is a democrat first and a socialist 
afterward. Much of the odium and misunderstanding attaching to the name 
" socialist " is due to the fact that it has in practice been appropriated by 
revolutionists of every shade of economic belief. Working side by side and 
under a common banner, we find (i) true socialists, whose programme con- 
templates an increase of the powers of the general government • (2) com- 
munists, who wish the local governments to do nearly everything, reducing 
to a minimum the powers both of the general government and the indi- 
vidual ; (3) anarchists, wlio distrust all governments, local as well as 
national, and wish their powers reduced to a minimum ; (4) nihilists, whose 
objections to the existing governments are so great that they do not think it 
worth while to delay over the discussion of a constructive programme in 
times when destructive work is all-important. 

So loosely has the word socialism been used, that non-revolutionary 
socialists deem it necessary to distinguish themselves by such terms as "col- 
lectivists," "nationalists," or " socialists of the [professorial] chair," 



356 MACHINERY AND LABOR. 

§ 395- With the leaders of the new unionism, insurance 
and benefit systems count for little or nothing. They are 
quite ready to support strikes ; they are even more ready 
to engage in political agitation. They believe with a 
great deal of reason that they are stronger politically 
than they are industrially. They rely less on the power 
of the individual strikers to enforce their demands, and 
more on the collective power to influence public senti- 
ment and legislation which is possessed by laborers as a 
class. They think that the growth of the democratic 
spirit in politics and industry has left the older trades- 
union leaders far behind the times. They would transfer 
the field of conflict from the place where capital is 
strongest to the place where numbers are strongest ; from 
the factory to the polling place, from the counting room 
to the council chamber. 

§ 396. One of the most important objects which the 
new unionism proposes to attain is the enforcement of 
compulsory arbitration in lieu of protracted strikes. 

In spite of the frequency with which they are inaugu- 
rated, strikes are not a particularly successful means of 
giving force to the demands of organized labor. The 
capitalist is usually so situated that he can await the issue 
of a conflict with less suffering, if not less actual loss, than 
the labor union which seeks to fight him. He can main- 
tain his family in comfort from the savings of past years, 
while the funds of the laborers that oppose him are gradu- 
ally exhausted by a protracted struggle. He can keep 
large masses of machinery idle through the exercise of 
his own individual will, while workmen are drifting in 
from other districts to take the place of the strikers. The 
attempt to prevent such laborers from accepting employ- 
ment is beset with diflficulty. The penalty of social ostra- 
cism, which is the most powerful one that strikers have at 
their command, may suffice to control the supply of home 
labor, but it does not stop the importation of laborers from 



POSITION TAKEN BY LABOR LEADERS. 357 

other places. The attempt to intimidate the new men 
puts those who practise it outside of the pale of the law 
and alienates public sympathy from the side of the 
strikers. In exceptional cases, where the wages pre- 
viously paid have been flagrantly inadequate, the compe- 
tition of other capitalists may compel an employer to yield 
to the demands of the strikers in order to prevent large 
profits from going into other hands ; but, except in these 
instances, the labor leaders are in the position of men who 
are attempting to corner the labor market with inade- 
quate capital. Such a policy is doomed to failure in the 
long run. 

If, however, the employer can be prevented from pro- 
tracting the dispute, the position of the strikers is different. 
They have only to hold together for a short time in order 
to be assured of success. They are placed on the kind 
of vantage ground enjoyed by the man who makes a 
corner in wheat when a large number of people have 
contracts which they must fulfil within a limited period 
(§ 175)- This is the most potent motive with those who 
demand compulsory arbitration. 

§ 397. They support this demand with strong argu- 
ments. They urge that the capitalist who builds a rail- 
road must undertake to serve the public continuously. 
The more complete the monopoly, the greater is the pub- 
lic necessity for uninterrupted service. This public need 
is paramount to all other considerations. The capitalist 
should not be allowed to withhold the necessary service 
from the public, merely because he cannot agree with his 
workmen as to the terms of payment. If a railroad com- 
pany professes itself unable on this account to deliver 
goods or to run trains, it should be compelled to do so by 
public authority. If it pleads inability to secure labor at 
fair rates, courts of arbitration should be established to 
decide what rates are fair 

§ 398. To this argument there is an equally strong 




358 MACHINERY AND LABOR. 

f 

reply. If capital is to be compelled to maintain continu- 
ous service on terms like these, it will be difificult to find 
, investors who are ready to put their money into business 
\enterprises which are subject to this liability. Such an 
' arrangement as the one proposed, while apparently fair 
to both laborers and capitalists, is really quite one-sided. 
It could be enforced against the employer but not 
against the employee. Laborers cannot be compelled to 
work on the basis of an arbitrator's award. They have 
not, as a rule, property enough to be held to such an 
agreement by the threat of pecuniary damages. No one 
would put them in prison if they refused to accept the 
rates offered. Even if they could be thus compelled to 
work against their own will, the service rendered under 
such terms would resemble slave labor, and might become 
dangerous ahke to the property of the employer and to 
the safety of the public. 

If capitalists are afraid to invest their money in new 
enterprises, both laborers and consumers suffer ; the con- 
sumer for lack of new sources of supply, the laborer for 
lack of new fields of employment. The loss to the 
laborer from this cause more than neutralizes any good 
which he may have obtained from the temporary enforce- 
(^ ment of his demands by a board of arbitrators. This is 
) illustrated by the history of the years 1885 and 1886, 
when the industries of the United States were virtually 
/ under a regime of compulsory arbitration. The Knights 
; of Labor were able so effectually to boycott the goods of 
obnoxious manufacturers that employers were forced to 
submit to their demands in this matter or suffer financial 
ruin. A boycott was a far more formidable weapon than 
a strike. It precipitated a contest at a point where the 
laborers enjoyed the advantage which is possessed by the 
holder of ready money as compared with the man who 
offers specific goods or services for sale. Th.e holder of 
money can find new places to buy what he wants far more 



COMPULSORY ARBITRATION. 359 

quickly than the man who has either labor or goods to 
sell can find new purchasers to take them. In a strike 
the employer had the money and the laborers the com- 
modity. In a boycott the positions were reversed. By 
refusing to buy his goods, the laborers attacked the em- 
ployer at his weakest point. If he remained unmoved by 
their refusal to purchase, the Knights of Labor could go 
to the dealers who handled those goods and threaten 
them with a boycott unless they supplied themselves from 
other makers. These dealers were often indisposed to 
defy such a threat for the sake of another man's quarrel. 
Cut off from his markets, the employer was compelled to 
submit the disputed matters to arbitration. Yet the re- 
sult was by no means advantageous to laborers as a class. 
The hands of the capitalists were so tied that productive 
industry suffered severely. Compulsory arbitration cre- 
ated more troubles than it settled. After a comparatively 
short experience, not only courts and capitalists, but 
laborers of the better class, united in condemning the 
boycott and the system of arbitration enforced by its use. 
It may be objected that the system of arbitration as 
administered by the Knights of Labor was a one-sided 
one, and that no conclusion can properly be drawn from 
such an instance as to the effect of equitable arbitration 
under public authority. But reasons have been already 
given to show that arbitration under public authority is 
likely to be one-sided. It is sought by the laborers and 
not by the capitalists. It deals with conditions which are 
as yet unknown and cannot be predicted with assurance 
by any board of arbitrators. If the decision of such a 
board is unfavorable to the workmen, they have it in 
their power to nullify it. If it is unfavorable to the capi- 
talist, he must nevertheless accept it. While public arbi- 
tration may be so organized as to avoid intentional 
unfairness, it can hardly fail to be one-sided in its effects^ 
because we can enforce it against one party and not 
against the other. 



360 MACHINERY AND LABOR. 

§ 399. We are placed in an awkward dilemma. If we 
do not admit the principle of compulsory arbitration we 
are liable to interruptions of public service at points 
where its continuous maintenance is essential to the com- 
fort and prosperity of the community. If, on the other 
hand, we adopt compulsory arbitration as a principle, we 
are liable to an interruption of the investment of capital 
where it is essential to social and industrial progress. The 
public is the sufferer in any event. We cannot assume, 
as was done two or three generations ago, that a conflict 
between labor and capital is one which the parties imme- 
diately interested may be left to settle for themselves. 
When there were a dozen independent capitalists and a 
hundred or a thousand independent laborers, a dispute 
between an employer and those who worked for him was a 
matter of very little public account. But where the com- 
bination of capitalists and laborers has become so com- 
plete that a single strike may interrupt the transportation 
service of a whole district and threaten large communities 
with famine and suffering, the case is wholly altered. We 
are, as Jevons says, working on the assumption that indi- 
viduals will act as individuals, when in point of fact the 
exigencies of modern industry compel them to act in 
masses. 

§ 400. There are some who advocate government own- 
ership of all monopolies as the only way out of this 
dilemma. But this remedy (aside from the other dangers 
connected with its adoption, which will be discussed in 
the next chapter) is by no means certain to meet the 
exigencies of the case. If a government avoids labor 
troubles by yielding to the demands of the organization 
in every instance, the want of discipline resulting from 
this practice will be serious if not destructive. We shall 
live under the rule, not of the people, but of a small sec- 
tion of organized labor. If, on the other hand, govern- 
ment resists the dem.ands of the organization, it will have 



LESSONS DERIVED FROM STRIKES. 36 1 

no means for maintaining its ground which will prove 
much more effective than those which capitalists now 
possess. The superior respect of the workman for a gov- 
ernment agency might count for something ; but our 
experience with railroads which are operated by the 
United States Courts under receiverships, shows that 
government authority is not enough to prevent strikes in 
cases of serious wage disputes. 

§ 401. Fortunately, the practical chance of escape from 
our dilemma is rather better than the theoretical one. 
Every strike teaches either workmen or capitalists some 
useful lessons for the future. There is a process of 
natural selection, under which leadership, both in organi- 
zations of labor and organizations of capital, must come 
more and more into the hands of men who are competent 
to exercise it. The time is past when the noisiest orator 
can control the labor organization or when the closest- 
fisted miser can succeed in the management of capital. 
So far as the managers on either side become in the true 
sense leaders of men, there is a chance for reducing labor 
disputes to a minimum. This may be a slow and unsatis- 
factory remedy for present troubles ; but it is the only 
one which appears to promise much hope of permanent 
success. 

§ 402. Government agencies for arbitration can be ar- 
ranged either to help or hinder this consummation. If 
they are so organized as to seem to give the laborer rights 
which cannot be put in force without public disaster, they 
will simply retard progress in these matters by invit- 
ing the repetition of experiments which are foredoomed 
to failure. If, on the other hand, they attempt to avoid 
trouble by giving opportunities for mutual understanding 
between employer and employed, and aim at preventing 
disputes rather than settling them, they strengthen the 
hands of those who are really competent to lead the 
forces on either side. The history of boards of arbitra- 



362 MACHINERY AND LABOR. 

tion, both in Europe and America, shows how Httle can 
be accompHshed by the exercise of pohtical authority 
after a fight has once begun. The work of courts of con- 
ciHation, on the other hand, shows how much can be done 
to prevent misunderstandings which lead to disputes, if 
they are taken in hand before matters have reached the 
stage of open hostiUty. The French Conseils de Prud' 
hommes have perhaps furnished the best though by no 
means the only examples of what can be done by courts 
of industrial conciliation. 

A very considerable proportion of the disputes between 
labor and capital may be characterized as wholly unneces- 
sary. They are the outcome, not of direct quarrels, but 
of misunderstandings. The employer wants to do one 
thing, the laborers think he wants something else ; they 
object to the latter, and he believes that they are taking 
exception to the former. Or it may happen that the men 
protest against a reduction in wages without knowing 
what the conditions of trade really warrant ; the employer 
insists on the reduction without giving facts to sustain his 
position ; the workmen strike in the belief that he is wil- 
fully refusing to give the wages they demand, when the 
truth is that he is prevented by sheer inability. After 
the strike is once inaugurated, it is often too late for fur- 
ther explanations. But a board of concihation, whether 
organized by the government or by the voluntary action 
of employers and employed, can render the greatest 
service, in enabhng each side to get a clear understanding 
of the other's position before matters have gone so far as 
to render cool action on the basis of such an under- 
standing impossible. 

§ 403. If, before any dispute arises, both parties can 
settle upon a satisfactory scheme for the determination of 
wages, and make a long-time contract on this basis, it pre- 
cludes much of the danger of labor troubles. The system 
which has seemed best adapted to this end is known as 



THE SLIDING SCALE. 363 

the sliding scale. By this method the workman's earnings, y ^ 
instead of being made proportionate to the product, as in 
ordinary piece-work, are made to depend somewhat upon 
its selhng price ; the rate of pay increasing as the price of 
the product increases, and vice versa. It has been ex- 
tensively applied in mining, and -to a less degree in some 
other lines of industry. Where the conditions will admit 
of its use, it has a decided influence in preventing labor 
troubles, by settling in advance the share in which the 
laborer and capitalist shall divide the advantages of a 
rising market or the burdens of a falling one ; nor is it, 
under favorable conditions, so complicated as to give rise 
to misunderstanding and suspicion.' 

§ 404. From the employer's standpoint no exception 
can be taken to the principle of the sliding scale. It 
undertakes to do for non-competitive labor what economic 
forces do for competitive labor — to give the workman the 
total value of what he makes, less a deduction for the 
necessary profits of capital. But from the workman's 
standpoint there is always a possible objection which may 
prove very serious. What if the price of the product, less 
the necessary deductions, fails to give him the income he 
needs in order to keep himself and his family alive? 
Looking at the matter from this side he proposes another 
standard as a basis of just remuneration — the standard of 
the living zvage. According to this view, labor should be 
paid enough to maintain it at a good grade of efificiency ; 
the amount necessary for this purpose being determined 
by the habits of life of the workers themselves.^ 

^ If we go one step farther, and give the workman, in addition to his 
wages, an interest in the net profits of the business, we have a case of profit 
sharing. The operation of this system is described in the next chapter. 

''■ The principle of the living wage was applied in England in past centuries 
by action of the magistrates, who from year to year fixed wages as low as 
they dared. Even this minimum is thought by Webb to have been in some 
degree a protection to the laborer. 

The present bearings of the agitation for a living wage are well treated by 
W. Smart, " Studies in Economics," London, 1895. 



364 MACHINERY AND LABOR. 

§ 405. The question, which is often asked and seldom 
answered, whether labor should be treated as a mere com- 
modity, is simply a rhetorical method of bringing forward 
the issue between the principles involved in the " shding 
scale " and the " living wage " as bases of determination 
of just payment. 

If the price of labor is determined by competition, labor 
is treated as a commodity ; if it is determined by the 
needs of the man himself, labor is not treated as a com- 
modity. If arbitrators act on the principle of the sliding 
scale, they commit themselves to the former view ; if they 
apply the principle of the living wage, they adopt the lat- 
ter. In the one case, they allow every laborer to get what 
he can ; in the other, they forbid the laborer to take less 
than a specified sum, even though the refusal should force 
him to starve or at any rate to become dependent on pub- 
lic support. Either alternative involves widespread hard- 
ship, which every serious student of the problem finds it 
hard to contemplate. Any one who has looked at the 
matter in all its difficulty is warranted in protesting 
against the uncritical use of phrases concerning the treat- 
ment of labor as a commodity, which have the effect of 
prejudging the whole case by placing a rhetorical em- 
phasis on the evils of one alternative in such a way as to 
preclude dispassionate consideration of the relative merits 
of both. 

§ 406. There is no doubt about the possibility of apply- 
ing the principle of the living wage if the public is pre- 
pared to take the consequences. If those who do not 
earn a living wage are left to starve,^ those who are 

' This danger is strikingly exemplified if we examine the effect of profes- 
sional etiquette upon the employment of men who are just making their start 
in life. Every profession has its customary scale of charges based in large 
measure upon the supposed cost of education and maintenance of men who 
can keep a high standard of professional attainment. The man who is begin- 
ning life is not allowed to underbid his established competitor. Without 
discussing the pros and cons of rigid adherence to such an established scale 



THE LIVING WAGE. 365 

more efficient can get what they demand. But this is 
hardly what is proposed by the advocates of the system. 
They do not believe that the consistent adoption of their 
principle would result in any considerable amount of star- 
vation. Some of them think that the gain to society in 
the avoidance of disease and vagrancy, of prostitution and 
crime, which would result from paying better minimum 
wages, would more than compensate any deficiency in the 
value of the product of those whose wages were raised. 
This would be hard to prove ; and it is difficult to see 
what practical measures could be devised for testing its 
truth, short of absolute socialism. Others, probably more 
numerous, think that if the producers only stand together 
they can dictate prices for the whole amount now con- 
sumed and get higher pay by simply demanding it. But 
in point of fact, if the producer dictates the price, the con- 
sumer responds by varying the amount which he pur- 
chases. If every laborer makes his product worth a living 
wage by rendering society what it regards as an equiva- 
lent for the food, clothing, fuel, shelter, and other things 
represented by that wage, he can get it. If he attempts 
to insist on the wage while not rendering the equivalent — 
or, what amounts to the same thing, rendering that which 
he deems an equivalent but which the consumer does not 
— no amount of combination will enable him to enforce 
his demands. He may refuse to work for less ; he cannot 
insist on being employed at a price which he deems fair, 
if the consumer views the matter otherwise. 

If the men who demand a "living wage " are prepared 
to increase their working efficiency as a means of making 

of charges, it is enough for the present purpose to point to the hardships 
which it inflicts upon many who are striving to maintain a foothold in medi- 
cine, in law, or in art. Not being free to sell his work for what the public 
will pay, the young professional man in the majority of cases finds his first 
years marked by a record of working-time unemployed except so far as he 
may use it for his own study, and of wants unsatisfied except so far as he can 
meet them from the previous accumulations of himself or of his friends. 



366 MACHINERY AND LABOR. 

good their claim, their demand is effective in securing its 
object and salutary in its influence upon industrial life. 
But to believe that the wages can be paid without the 
work, or even that the increased efBciency of work neces- 
sarily results from improvement in wages, seems a danger- 
ous fallacy. 

§ 407. The majority of trades-union leaders appear to 
underrate the closeness of the competition of capital and 
the narrowness of the margin of profit. They do not 
realize how closely actual piece wages have been forced 
up to the limit which prices will allow. They believe that 
more is to be expected from combination of labor than 
from competition of capital. They sometimes support 
their position by the claim that machinery has destroyed 
competition between capitalists and allows them to pay 
^ unfairly low wages. We have seen in a former chapter 

(§§ 176-180) how often similar statements made concern- 
ing the effect of machinery upon consumers have proved 
to be exaggerated. Even where the individual consumer 
is not well protected, the general rate which the capitalist 
can charge is limited by causes less obvious than imme- 
diate competition, but hardly less effective. The same 
thing holds true in regard to labor. A time might con- 
ceivably come when capitalists would be closely enough 
united to offer labor less than the value of its products, 
employ a few laborers at that rate, leave the rest to 
starve, and appropriate the large margin of profit to 
themselves ; but this state of things is very far from being 
realized at present.' 
» § 408. Under these circumstances the substitution of a 

^ ' bargain between united labor and capital, for the inde- 

' The common assertion that competition is more intense as the number of 
competitors becomes greater, seems to be a loose inference from the fact that 
prices are apt to be higher as the demand for an article becomes greater. It 
is easy to see that these two things really have nothing to do with one 
another. As a rule, the closest competition is that which prevails between 
two well matched rivals. 



LABOR MONOPOLIES. 367 

pendent competition of laborers and capitalists with one 
another, could hardly prove a gain to the laborer. In 
a bargain, the capitalist's superior strength and intelli- 
gence must tell against the laborer. In competition, the ,. 
laborer has the advantage of the strength and intelligence V^'/^^^r*^ 
of different capitalists to secure him a market rate of''' ' '" 
wages. In trying to substitute the former system for the 
latter, the workman foregoes the advantage which he 
receives from the strength of the capitalists in a competi- 
tion, and submits to the disadvantage which this strength 
imposes upon him in a contest of wits or endurance. 

§ 409. He finds himself at an equally serious disad- 
vantage in attempting to set a monopoly price on labor, 
and to reduce the supply as a means of maintaining the 
price thus fixed. We have seen how universal is the fail- 
ure of combinations of capitalists when they attempt to 
carry out this policy. Where the capitalists fail, with 
every advantage in their favor, it is hardly to be expected 
that the labor organizations should succeed. The gilds 
were unable to maintain a labor monopoly ; and the gilds 
had many circumstances on their side which modern 
labor organizations have not. To begin with, they did 
not pretend to care for the interests of labor in general ; 
they were occupied with securing special advantages for 
their own labor. Moreover they had the full support of 
the ruling powers. Their interests were in many respects 
identical with those of the landowners, who possessed 
dominant political authority. The landowners wanted 
agricultural wages low ; the gilds wanted municipal wages 
high. Both objects could be accomplished by a policy 
which kept large numbers of laborers in the country and 
prevented them from flocking to the towns. Accordingly 
we find that gilds and landowners worked in harmony in 
most measures of industrial legislation. Almost all chance 
of bettering his condition was cut off from the agricultural 
laborer by acts of settlement, which prevented his moving 



368 MACHINERY AND LABOR. 

from one parish to another unless he could give the 
authorities in his new home satisfactory assurance that 
he would not become a burden on the rate payers. The 
consequence was that an over-supplied labor market in 
one district could not find relief by migration to another 
and possibly more favorable farming region. Change of 
occupation was yet more effectively cut off from the 
farmer's son by restrictions on the right to exercise a trade. 
Under the pretext of compelling a workman to learn a 
trade thoroughly, the statutes of apprenticeship were 
often used to prevent most applicants from entering it at 
all and to force those who did enter to become rigidly 
bound down to antiquated methods. All these measures 
helped the leaders of the gild to limit the labor supply in 
their several trades. But no monopoly, however fortified 
by traditional rights and political alliances, could prosper 
by refusing to do public service ; and as soon as Europe 
became peaceful enough to admit of investments of capi- 
tal, the industrial power passed from gilds who were 
trying to restrict production, to capitalists who were 
ready to increase it. 

§ 410. The political position of the modern labor or- 
ganization is so much less strong than that of the gild, 
that its mistakes are not likely to be so wide-reaching in 
their consequences. But the same tendencies which made 
the gilds a burden on society show themselves in the 
management of trades-unions ; and this is the chief reason 
why thoughtful men look on these organizations with so 
much distrust. It is not because they promote strikes, 
but because they discourage industrial efificiency. This 
is not true of all unions, but it is unfortunately true of a 
very large number. They seek their interest, not in 
doing as much as possible, but in doing as little as pos- 
sible. Instead of trying to make their members useful to 
capitalists and consumers alike, they undertake to drive a 
bargain with the capitalist, and they thereby antagonize 



DANGERS OF SLOW WORK. 369 

the interests of the consumer. While they honestly 
attempt to promote good work, they are yet more occu- 
pied with promoting slow work. Such a policy not only 
gives society short service, but handicaps the strong men 
who would otherwise take the lead in industrial progress. 
Until the representatives of organized labor recognize 
the evils involved in this course, the dangers involved in 
labor organizations are likely to outweigh their possi- 
bilities of good. 



CHAPTER XII. 

COOPERATION. 

Profit-Sharing — Producers' Cooperation — Forms of Consumers' Cooperation 
— Government Management of Industrial Enterprises. 

D. F. Schloss : "Methods of Industrial Remuneration," London and 
New York, 1892. 

N, P. Oilman : " Profit-Sharing between Employer and Employee.'' 
Boston, i88g. 

G. J. Holyoake : " The History of Cooperation in England." London, 
1875, 1879. 

[Johns Hopkins University] " History of Cooperation in the United 
States." Baltimore, 1888. 

§ 411. The relation between labor and capital is most 
satisfactory when there is no sharp separation into classes ; 
where many of the capitalists have risen from the ranks 
of labor, and many of the laborers themselves hope to 
become capitalists. Under such circumstances we have 
every stimulus for efificient production, and little or no 
opportunity for misunderstandings and conflicts. It is 
this state of things, quite as much as the abundance of 
free land, which gives the inhabitants of a new country 
their economic advantages. 

§ 412. Unfortunately, this condition is far from being 
realized in Europe in the nineteenth century ; and America, 
though better off than Europe, is making progress in the 
wrong direction. The business men in the present genera- 
tion have in large part risen from the ranks of labor to 
their existing position of leadership ; but whether the same 

370 



SEPARATION OF LABOR AND CAPITAL. 37 1 

thing can be predicted for the next generation is very- 
doubtful. Certain it is that the prospect of becoming 
capitalists does not act as so powerful a motive on the 
laborers of to-day as it did on those of a generation ago. 
The opportunities to save are as great or greater ; but the 
amount which has to be saved before a man can hope to 
become his own employer, has increased enormously. 
When a man who had accumulated a thousand dollars 
could set up in business for himself, the prospect of inde- 
pendence appealed to him most powerfully ; when he can 
do nothing but lend it to some richer man, the incentives 
and ambitions connected with saving are far weaker — too 
weak, in many cases, to lead the man to save at all, ex- 
cept through the medium of a friendly society or trades- 
union. We thus have a separation of the community 
into more and more rigidly defined groups, different in 
industrial condition, distinct in ideals, afid oftentimes 
antagonistic in their ambitions and sympathies. This 
separation of laborers and capitalists into distinct classes 
involves serious dangers to society as a whole. 

1. It increases the liability of industrial conflicts, pro- 
ducing strikes and lockouts, which throw laborers out of 
employment and machinery out of productive use. The 
harm done by these conflicts is by no means confined to 
the individual contestants, but may occasion misfortune 
to the whole body of consumers. 

2. It neutralizes a large part of the advantages of the 
institution of private property^ If a laborer does not ex- 
pect to accumulate money and become a property owner, 
he loses an incentive to hard and efficient work which 
makes his service most valuable to society. 

3. It involves a contradiction between our political 
theories and the facts of industrial life. A republican 
government is organized on the assumption that all men 
are free and equal. If the political power is thus equally 
distributed while the industrial power is in the hands of a 



372 COOPERA TION. ■ 

few, it creates danger of class struggles and class legisla- 
tion which menace both our political and our industrial 
order. 

§413. Some look for the solution of these difificulties 
in a paternal policy on the part of employers toward those 
whom they employ. It is said, with a fair measure of 
truth, that much of the existing industrial friction arises 
from the fact that men are treated as machines. The 
employer tries to make as good a bargain with his work- 
men as he can, and does nothing more than this. It is 
urged that manufacturers should make provision for the 
well-being of their operatives by public improvements, by 
the erection of sanitary dwellings, by the establishment of 
insurance funds, and by a number of other agencies which, 
shall bind the interests of labor and capital together. 
Much good can undoubtedly be done in this way. We 
see this exemplified in an institution like the fajnilistere 
at Guise or in some of the factory towns of the United 
States where the capitalists have taken a living interest ia 
the welfare of their employees. But the remedy is by no 
means a sure one. The modern workman is apt to chafe 
under the feeling that his insurance funds are in the hands 
of his employer. Nor does he always like to live in houses 
owned by the corporation for which he works, even when 
such houses are well built and rented at a fair price. 
There is a feeling of dependence which often proves irk- 
some, and may give rise to serious misunderstanding. 
Events like the Pullman strike of 1894 show the dangers 
to which a system of this kind is liable. And even when 
these experiments are thoroughly successful, they only 
touch the surface of the difficulty. They meet the first 
of the evils enumerated, but not the second and the third. 
They diminish the possibility of open warfare between 
laborer and employer ; but they do not, to any conspicu- 
ous degree, arouse the ambition of the laborer or avoid 
the conflict between industrial facts and political theories. 



PROFIT-SHARING. 373 

Indeed, the system of paternal care and provision, unless 
administered with the utmost wisdom, leads to flagrant 
violations of the modern doctrine of social equality. 

§ 414. Another way of meeting these dangers is by 
encouraging workmen to become owners of stock in the 
companies for which they work. Many employers give 
their hands every facility for thus becoming stockholders, 
on terms more favorable than those which are open to the 
general public. Such employers believe, and with a great 
deal of reason, that the gain to the company in assuring 
itself of the devotion of its men, is one which will more 
than balance an apparent loss of money on the sale of the 
stock. But a measure of this kind, though good as far as 
it goes, is somewhat limited in its application. It is a 
difficult one to put in practice where the concern is so 
large that the employer does not come into direct contact 
with his hands ; for in the absence of such contact, the 
privilege of buying stock at less than market rates is 
almost certain to be abused. It is thus inapplicable in 
just those cases where a remedy for labor troubles is most 
needed. Nor does it, in any real sense, make the work- 
man his own employer. It gives him a fractional share in 
electing the people who say how he is to be employed — a 
very different thing, both in theory and in fact, and one 
which is far from putting the laborer in a position of 
independence. 

§ 415. A third remedy, which has a little wider applica- 
tion, is found in profit-sharing. Under this system the 
workman, in addition to his regular wages, receives a 
dividend from the net profits of the business in which he 
is employed. This stimulates him to make the interests 
of the employer his own, and gives him, in some measure 
at any rate, the ambitions and motives of a property 
owner. This plan was brought prominently into notice 
by the success of Leclaire, a Parisian house decorator, 
who adopted it in 1842 and placed it on a permanently 



374 COOPER A TION. 

efficient basis, making his own fortune, as well as that of 
many of his workmen, by its results. Profit-sharing has 
been carried on with a fair measure of success by many 
other houses in France, particularly since 1870, as well as 
in Switzerland and in Germany. In England and in the 
United States the results have not been so good. Though 
we find some isolated instances of successful profit-sharing, 
the system has not proved its power to stand a severe 
strain or to prevent the occurrence of destructive strikes. 
§ 416. The most noted experiment in profit-sharing in 
England was that of the Briggs collieries, near Leeds. Its 
apparent success was so great that Jevons at one time pro- 
nounced it a decisive proof of the ability of the system of 
profit-sharing to accomplish what its advocates claimed. 
But in 1875, under the stress of hard times, the whole 
scheme was wrecked. As long as trade was prosperous 
and wages were advancing, all went well. But when 
trade conditions changed, the men struck against reduc- 
tions in wages. The wage dispute was referred to arbitra- 
tion, and the arbitrator decided in favor of the employers. 
But the experiment in profit-sharing was at an end. The 
bulk of the shareholders objected to the continuance of a 
system under which they shared profits with their work- 
men, but which did not make those workmen any more 
ready to share losses or prevent them from resorting to 
the old method of warfare between capital and labor, 
which it was confidently hoped that industrial partnership 
had forever banished. Various explanations have been 
given of the failure of this experiment. It is said that 
while the Briggs family were heartily and loyally in favor 
of the system of profit-sharing, the outside stockholders, 
who owned a majority of the capital of the concern, were 
not. It is also stated that serious mistakes of policy were 
made during the years of great industrial prosperity, by 
which the success of the enterprise was unnecessarily 
endangered. Even granting the truth of all this, it is 



DIFFICULTIES OF PROFIT-SHARING. 375 

clear that the system did not do what was expected of 
it. It did not prevent a strike on the first occasion when 
its usefulness was put to any serious test. The claim 
that the experiment would have been continued if the 
bulk of the shareholders had been sympathetically in- 
terested in its success, is a virtual admission that it did 
not succeed when judged on business principles alone. 
The fact is that the workmen did not heartily care for it. 
They were glad to see it in operation when it increased 
their wages ; but the past experience and future anticipa- 
tion of its benefits did not enlist them in its support 
strongly enough to prevent a strike when there appeared 
to be a prospect of present gain by the employment of 
that means. A similar comment may be made on the 
failure of an almost equally noted American experiment 
— that of Brewster & Co., in carriage manufacturing. For 
two or three years the employees enjoyed the increase of 
wages which the system afforded them, but they could not 
resist the pressure which their fellow workmen brought 
to bear upon them to enter upon an ill-advised and unjus- 
tified conflict with their employers. 

§ 417. There has been a sufHcient number of success- 
ful experiments in profit-sharing to turn the hopes of 
many economic reformers in this direction. But it must 
be confessed that it has accomplished far less than its 
advocates have prophesied, and perhaps less than the 
majority of unprejudiced critics were disposed to antici- 
pate. There are reasons which do not appear on the 
surface, which too often make the expected benefits prove 
illusory. 

If it were true, as many people suppose, that ordinary 
business offered a large surplus of profit, which would 
give room for the distribution of a handsome addition to 
the workman's wages without involving the employer in 
bankruptcy, there would be a better chance to apply the 
system of profit-sharing as a panacea for labor troubles. 



3/6 COOPERATION. 

But we have seen that this is far from being the case. 
The competition of capitahsts with one another has in 
the majority of cases cut down profits to so low a figure 
as to leave little if any room to increase wages at the ex- 
pense of the employer. If the laborer is to receive a bonus 
in addition to his wages, one of two things must happen. 
Either his efficiency, care, and steadiness must be so in- 
creased as to create the additional profit from which this 
bonus is paid ; or he must be prepared to accept a lower 
minimum wage to compensate for his chance of a higher 
maxinjum, and leave the average where it now is. 

§ 418. The advocates of profit-sharing generally accept 
the former alternative. They believe that the laborer, in 
a profit-sharing industry, will do more work, exercise more 
care, and abstain more surely from labor disputes than he 
would under the traditional wage system ; and that in this 
way he will create the profit to be divided. The facts 
hardly warrant this belief, especially in the case of the 
American workman. In the list of profit-sharing indus- 
tries, one of the most conspicuous features is the large pro- 
portion of them which report no profit to divide.' Nor is 
this to be wondered at. In the complicated industry of 
modern times, the connection between the individual effort 
of a single workman and the general profit of the business 
as a whole is too remote to act as a very powerful stimulus. 
If all the operatives simultaneously can be nerved to a 
higher degree of effort or of care, the results will unques- 

^ It should also be remembered that these lists, from the very nature of 
the case, make the percentage of successes appear too large. The records 
of failure are never as well preserved as those of success. The successful 
experiments of the last ten years can be tabulated with tolerable complete- 
ness. They are known, and their promoters are anxious to have them known. 
The failures are far harder to discover and tabulate. They are forgotten, 
and their promoters are anxious to have them forgotten. It is very difficult 
to hear about experiments which were quietly abandoned five or ten years 
ago, unless there were some unusual conditions in their history which placed 
their failure on record at the time. 



WHEN PROFIT-SHARING CAN SUCCEED. 377 

tionably be gratifying. But if many of them are already 
working up to the Hmit of their powers either in the mat- 
ter of output or of economy, there is no chance for such 
general improvement. The gain from the increased effi- 
ciency of any individual will be distributed among those 
who have done comparatively little to deserve it. The 
smallness of the quotient and the inequity of distribution 
both interfere with the attainment of good results from 
the system. They may do even worse than this. If a 
man has worked much harder than before and received 
little or no increase of pay, he is sometimes in danger of 
suspecting the good faith of his employer. Even if he 
has access to the employer's books, he has not the knowl- 
edge of bookkeeping which would enable him to test the 
conclusiveness of what they show. Where there are no 
profits to divide, the system of profit-sharing may breed 
those very misunderstandings between capital and labor 
which it is designed to prevent. 

§ 419. Where the laborers under the old wage system 
are not working up to a high standard of efficiency, there 
is more chance for the success of profit-sharing. This 
seems to be the reason why it works better on the Conti- 
nent than in England, and better in England than in 
America. There is a greater chance for increase in the 
general output in those countries where the men have 
habitually been working far below their physical capacity ; 
and profit-sharing, like anything else which contributes to 
such an increase, is a first-rate thing for the workmen. 

§ 420. Profit-sharing without such probable increase of 
output must be unqualifiedly condemned. It makes the 
workman a sharer in gains and losses which are essentially 
speculative in their character. For it must be remembered 
that only a part, and not the larger part, of the variations in 
profit is due to variations in cost of production. Most of 
these variations are due to changes in the selling price of 
the product — a thing over which the workman has no con- 



378 COOPERATION. 

trol whatever. To make his wages depend on net profits, 
under these circumstances, is to force him to participate 
in the speculations of his employer — a result neither 
equitable as between individuals nor desirable for society 
as a whole.' 

§421. To avoid this difficulty, the attempt is some- 
times made to determine how much of the gain in a 
business is due to the work of the operatives, and how 
much to the speculative power of the capitalists and their 
representatives ; crediting the operatives with the profit 
under the former head, and not making them liable to the 
contingencies which affect the latter. Sometimes this is 
accomplished by premiums on coal economy, such as are 
offered by certain railroad companies ; sometimes by a 
carefully arranged computation of expenses, under which 
a bonus can be added to the regular wages of the opera- 
tives in case the normal standard of cost is diminished. 
The chief difficulty of these computations is found in 
their complexity. It is hard to ascertain which items of 
expense should be charged to the labor cost of a product ; 
it is perhaps equally hard to persuade the laborers that 
the employer is accurately following out the apportion- 
ment on which he has agreed. 

^ "It is quite possible that the workman who, in the hope of earning 
' bonus to labor,' has done work 10 per cent in excess of the normal standard, 
may, even under a liberal scheme of profit-sharing, find that, instead of 
receiving an addition to his normal wages of, say 5 per cent, the bad manage- 
ment of his employer has reduced his bonus to so low a level that he has 
to be content with a supplement equivalent to only 2 per cent on his wages, 
or that no bonus whatever is available. If I am to do 10 per cent more and 
better work than I did last year, why not offer me a 10 per cent increase in 
my wages, subject only to its being shown that my work exhibits a 10 per 
cent improvement? Why tempt a working-man to gamble by staking 
part of the reward of his labor upon the financial results of a business over 
the conduct of whose financial operations he is not allowed to possess any 
control, and would, perhaps, seldom be competent, even if he were allowed, 
to exercise any useful control?" (Schloss, "Methods of Industrial 
Remuneration," pp. iSg, 190.) 



ASSOCIATIONS OF PRODUCERS. 379 

§ 422. A more radical reform in the condition of the 
employees is contemplated by the advocates of co- 
operation. 

Cooperation is often confounded with profit-sharing ; 
but the two thiftgs are radically distinct in their nature. 
Profit-sharing is a change in the method of payment, 
which is intended to induce the workman to identify his 
own interests with those of his employer, but which 
leaves the direction and management of the industry 
unaltered. Cooperation, on the other hand, involves a 
change of management. A cooperative enterprise is con- 
trolled, not by the representatives of the investor, but by 
the representatives either of the laborers or of the con- 
sumers. In the former case it is known as productive co- 
operation ; in the latter, as distributive or consumptive 
cooperation. 

§ 423. The history of productive cooperation goes back 
to a very early period. The mediaeval gilds were co- 
operative enterprises. They were managed, not by cap- 
italist employers, but by associations of workmen who 
contributed from their own funds whatever capital was 
required for the conduct of the industry. But their con- 
servatism of method led to their displacement by capital- 
istic industry; and it is not until about the middle of the 
present century that we find widespread attempts to re- 
establish the system of cooperative association. Many 
cooperative societies were established in France in con- 
nection with the revolution of 1848. Unfortunately, 
these enterprises were directed by popular enthusiasm 
rather than by careful business calculation. A few, 
notably among masons and piano makers, were successful. 
The majority were total failures. Those which survived 
have as a rule abandoned the cooperative form and have 
become joint stock companies owned by workmen. More 
recent French cooperative movements, though often dis- 
cussed in economic literature, do not appear to possess 



380 coo PER A TION. 

great industrial importance. A number of English ex- 
periments in cooperative production were made in cotton 
manufacturing between 1850 and i860. But the difficul- 
ties consequent upon the American civil war ruined most 
of these enterprises, nor have they sulasequently been 
revived on any large scale. Of American attempts in pro- 
ductive cooperation the most conspicuous instance has 
been furnished by the coopers of Minneapolis. A num- 
ber of journeymen organized a shop of their own in 1868, 
which has extended its work from year to year and has 
found many imitators. Its methods have been admirable, 
its credit high, and it has had the effect of developing 
business capacity in men who were not aware that they 
possessed it. There have been also instances of success- 
ful organizations of this sort among wood-workers in St. 
Louis and among boot and shoe companies in Massa- 
chusetts. But the whole number is small in proportion 
to the amount that has been said about them. 

§ 424. It is always doubtful whether the operatives will 
choose as good a manager as the stockholders of a cor- 
poration, or whether the manager whom they choose can 
enforce good discipline among those on whom he depends 
for his place. It is often hard for workmen to realize the 
value of the services of a responsible and efficient man- 
ager. They are not willing to pay him a high salaiy ; 
and this false economy too often wastes more money than 
it saves. The lines of business in which productive co- 
operation is most successful are those of comparatively 
simple character, where industry counts for most and 
management for least ; Mdiere the connection between the 
efficiency of the labor and its result is most obvious, and 
where the necessity for organizing power and speculative 
foresight are reduced to a minimum. In such industries 
the superior ambition of a workman who feels that he is 
his own employer may stimulate him to an increased 
amount of work and increased care in the use of mated- 



LASSALLE'S PLAN. 38 1 

als, which will outweigh any lack of speculative skill. 
This is conspicuously the case in the countries of Conti- 
nental Europe, where the ordinary standard of work is so 
low as to leave great room for gain in those directions. 
The more completely the workman is in the habit of 
utilizing his powers under the old system, the less chance 
is there for gain under the new. For this reason the 
United States furnishes, in some respects, the least prom- 
ising field for enterprise of this kind. 

§ 425. It is believed by many socialists that the chief 
present hindrance to productive cooperation is the dififi- 
culty which workmen meet in their efforts to obtain 
capital. An association of laborers cannot work to the 
best advantage unless it controls modern machinery ; and 
modern machinery costs a great deal of money. Ferdi- 
nand Lassalle proposed that the government should meet 
this difficulty by advancing capital to associations of 
workmen, who would guarantee to make good its value 
at the close of the period of production. In this way he 
thought that the present monopoly of capitalists in the 
control of industry would be abolished. A man who had 
no capital, but was willing to work, would be put on an 
equality with one who had inherited capital from his 
father or saved it from his business. But the history of 
productive cooperation gives us little encouragement to 
expect much good from a project of this kind. 

In speculative investments of capital it is quite impossi- 
ble for any association, of laborers or of any other men, to 
guarantee that the value of their product to society will 
equal the value of the goods consumed by the laborers in 
the course of its production. As business is carried on 
to-day the losses from unsuccessful investments are very 
frequent indeed. They would inevitably be even more 
frequent if these investments, instead of being made by 
capitalists at their own risk, were made by laborers at the 
public risk. There is every reason to believe that the 



382 COOPER A TION. 

waste of public capital under Lassalle's system would 
many times outweigh any public gain from increased 
freedom and energy on the part of the laborers. 

Where the return on an investment is reasonably sure, 
it is quite easy to find the money to set an enterprise in 
motion without government aid. It is not scarcity of capi- 
tal, so much as scarcity of business ability, which makes 
productive cooperation so difficult at the present day. 
So disinterested an observer as Schloss regards the ideal 
of a self-governing workshop as " a curious mixture of 
unsound economics and ill-directed philanthropy," and he 
asserts that the measure of the success which the coopera- 
tive movement has attained and of the improvement 
which it has effected in the position of the working classes 
has been in proportion to their abandonment of the ideals 
and methods of producers' cooperation for those of con- 
sumers' cooperation. 

§ 426. The latter system has certain theoretical advan- 
tages which the former does not enjoy. When consumers 
are managing a business they have it in their power to 
avoid many difficulties to which the capitalist employer is 
subject. Consumers can impose upon themselves a set of 
rules which they would not tolerate if imposed from out- 
side. By obedience to these rules they can secure great 
gain in economy of production, without diminishing the 
utility of the goods and services received. By their ex- 
perience in adopting and enforcing these rules they can 
educate themselves to a far higher degree of economic 
forethought than they would otherwise be likely to pos- 
sess, and can obtain a decided increase of comfort, both 
for themselves and for the community as a whole. 

The three most important forms of consumers' coopera- 
tion are cooperative purchase, cooperative insurance, and 
cooperative banking. 

§ 427. Cooperative purchasing agencies, through which 
the buyer gives orders for what he wants instead of wait- 



ENGLISH COOPERATIVE STORES. 383 

ing for the seller to come and show him a variety of goods, 
have proved of the highest value. This has been con- 
spicuously the case in country districts, where buyers are 
scattered, stocks of goods inaccessible, and travelling 
agents more or less irresponsible in their acts because of 
the absence of competition. The Patrons of Husbandry 
have secured much advantage for their members and for 
the public by a system of cooperative purchase, and the 
same thing may be said with even more emphasis of the 
agricultural syndicates in France, Germany, and other parts 
of Europe. 

§ 428. Where the cooperators have stores as well as 
purchasing agencies — in other words, where they aim to 
keep a stock of goods on hand to supply current demands 
- — any success which they may achieve is more conspicu- 
ous, but the danger of failure is at the same time indefi- 
nitely multiplied. One of the earliest and most successful 
of the cooperative stores was started at Rochdale, in 
England, in 1844, by the modest attempt of a number of 
workmen to buy a few ordinary supplies for their own use. 
The economy which resulted from this undertaking was 
so great that their example was rapidly followed in other 
English towns. At the present day the cooperative 
societies of this kind in the United Kingdom have a 
membership of about a million, a capital amounting to 
about ten million pounds sterling, and annual sales of 
three times that amount. 

The great gain in economy realized by the English co- 
operative stores was due to their adoption of a system of 
cash payments. The retail business of the United King- 
dom had been burdened with the practice of giving long 
credits, many of which offered no prospect of collection. 
The cost of this method of doing business ultimately fell 
on the solvent consumers, who had to pay for the insol- 
vent as v/ell as for themselves. This credit system also 
interfered with competition, because many customers be- 



384 COOP ERA TION. 

came bound to a particular store at which they kept their 
account, and were not readily able to go elsewhere. A 
cooperative society avoided all loss from bad debts by 
insisting on cash payments, and was thus able to give its 
members a reduction from the current retail prices which 
covered both the loss from bad debts and the gain which 
the storekeepers had been accustomed to exact on the 
basis of their partial immunity from competition. In the 
United States, where retail credits were less abused than 
in England, and where competition had probably been 
more universal, there was less chance of economy from 
this source, and the success of cooperative stores was 
therefore much less conspicuous. Though the Patrons of 
Husbandry have established large numbers of successful 
purchasing agencies, their losses from cooperative stores 
have been very serious. Even more noticeable was the 
failure of an organization known as the Sovereigns of 
Industry, established in New England in 1874 with the 
avowed purpose of maintaining cooperative stores. Their 
purchases were not judiciously made, and in a short time 
the societies were loaded with unsold goods. They tried to 
economize in the wrong direction, by lowering the salaries 
of their managers ; and only too late did they find that 
cheap management wasted much more than it saved. 

§ 429. A cooperative establishment has the advantage 
of avoiding many expenses of advertising and of being 
sure of a regular flow of business. Where the conditions 
of sale and purchase are comparatively simple, as in co- 
operative creameries and other enterprises which render 
a restricted range of services, these advantages are great 
enough to make the chance of success very considerable. 
But for ordinary commercial purposes the indications are 
that capitalistic enterprise does better than cooperation, 
unless there is some specific reform in methods of purchase 
or supply, like the abolition of the credit system, which the 
cooperators are prepared to inaugurate. 



MUTUAL INSURANCE. 385 

§ 430. Some of these reforms are promised by the ad- 
vocates of cooperative insurance. In the competition of 
different insurance companies with one another, large 
commissions are paid to agents for their services in secur- 
ing business. These commissions represent a factitious 
element in cost, due to the strife of rival companies, and 
are wholly unprofitable to the public, except so far as 
the activity of agents leads people to make a fuller use 
of the advantages which insurance offers. Even this 
modicum of good is probably neutralized by the evils of 
over-insurance for which agents are often accountable. 
People are induced to insure their lives at a higher rate 
than they can properly afford, or to insure their houses 
for a larger sum than the company can ever be compelled 
to pay. When the amount of insurance can be thus arti- 
ficially inflated there is a temptation to the agents of the 
company to accept improper risks for the sake of the 
commission involved, and to the parties insured to be 
careless with regard to fires and other sources of loss. 
It is claimed that a cooperative company can avoid 
these dangers, and by a system of mutual watchfulness 
can lessen risks instead of increasing them. 

§431. The history of fire insurance in the United 
States affords a conspicuous example of what can be 
done in this way, though not one which has any direct, 
bearing on the relations between labor and capital.. 
About 1870 certain factories, which previously had to pay 
very high rates of insurance, undertook to insure one 
another through a cooperative organization which should 
have in view, not only the adjustment of losses, but the 
reduction of such losses to a minimum. Its members vol- 
unteered to submit to certain rules of construction and 
operation which should render the liability of fire as slight 
as possible. Under the efficient guidance of its secretary, 
Mr. Edward Atkinson, the first of these companies speed- 
ily reduced the rate of insurance for its members to a 



386 COOP ERA TION. 

small fraction of what it had been under the old system. 
This saving represented a gain in public as well as in 
private wealth. Anything which can reduce the number 
of fires avoids at once the loss of property which the man- 
ufacturer feels, and the loss of comfort which the work- 
man suffers from interruption of business and the result- 
ing irregularity of employment. Never was there a more 
signal instance of the good possibilities of cooperation. 
The old companies had been content to adjust risks. 
The manufacturers' mutual companies succeeded, not 
only in adjusting them at far less cost, but in reducing 
them to a figure which a few years ago would have been 
thought impossible.' 

§ 432. In life insurance, the friendly societies of Eng- 
land and fraternal societies of the United States have 
;had a considerable measure of success in reducing expen- 
ses of management, and have been able to give their 
members a variety of forms of benefit which the joint- 
stock companies could not have undertaken without 
serious danger of abuse. Whether combined with trade 
societies or not, they have afforded many indirect advan- 
tages more or less separate from the main purpose of the 
organization. As an offset to these benefits we must note 
the disadvantage due to the inferior financial responsibil- 
ity of many cooperative companies. In the early years 
of any such organization the assessments are apt to be 
made too low, and a corresponding burden is placed on 
the survivors during its later history — a burden which 
jhas in many instances proved too hard for the society 
io carry. 

§ 433. Cooperative banking is perhaps even more im- 

^ The obvious advantage of combining fire insurance with fire prevention 
has led to a desnand that municipalities, which take charge of the latter, 
should also assume the risks and profits of the former. But this does not 
distribute the risks over a sufficiently large area. A fire like that of Chicago 
a quarter of a century ago would bankrupt a municipality that undertook to 
insure its citizens. 



COOPERATIVE BANKING. 38/ 

portant than cooperative insurance. The essential feature 
of a cooperative bank is that a body of men, many of 
whom expect to become borrowers, should furnish the 
capital and regulate the conditions of its lending and re- 
payment. The largest experiment of this kind was made 
in Germany, under the leadership of Schulze-Delitzs.ch. 
His first cooperative bank was established in 1849. ^^^^ 
progress of the system was slow until i860, but much 
more rapid after that date. In 1889 the German coop- 
erative banking associations had 490,000 members, a cap- 
ital of over $30,000,000, and deposits of twelve times that 
amount. The underlying idea of the system of Schulze- 
Delitzsch is that a body of laborers shall enable itself to 
obtain credit by collecting a small capital in the hands of 
the association, shall attract outside investors by the offer 
of a fair rate of interest, and shall then loan funds to its 
members after direct personal examination of the circum- 
stances of the borrower. In the earlier associations, the 
liability of the members was unlimiited ; of late years this 
feature has been changed. The educational effect of 
these companies, both in stimulating workmen to save, 
and in teaching them the conditions governing the con- 
duct of business, has been incalculably good. Perhaps 
the strongest tribute to their efificiency is furnished by 
the opposition of the socialists, who see in the success 
of plans like this the most insuperable barrier to the 
acceptance of their doctrines among an intelligent and 
powerful section of German workingmen. 

§ 434. In England and the United States cooperative 
banking has been chiefly confined to a more restricted 
field. It has dealt almost exclusively with loans intended 
for building purposes. The first building society was or- 
ganized in England in 1781 ; the first legal recognition of 
such societies dates from 1836. There are now some 
2,500 such companies, with aggregate assets of nearly 
sixty million pounds sterling. The first building society 



388 COOP ERA TION. 

in America was organized near Philadelpliia, in 1831. In 
1890 there were over 5,000 such companies in the United 
States, with members numbering more than a million, not 
quite one third of whom are borrowers, and with assets of 
perhaps $400,000,000. As these societies are commonly 
organized, the paid-up value of the shares is fixed at 
$200 each, payable in instalments of $1 a month. If no 
interest accrued, it would take 200 months for these 
payments to amount to the face value of the share. But 
as the subscribers are credited with the amount of interest 
earned by their funds, they pay for their shares in about 
two thirds of that time. The money thus obtained from 
month to month is loaned to shareholders, who agree to use 
it in building houses under the supervision of the ofiticers of 
the society. The amount which any man can borrow is 
limited by the maturity value of the shares for which he has 
subscribed. Thus, the man who has subscribed to five two- 
hundred dollar shares may borrow as much as $1,000, if 
the funds are on hand for the purpose. When, as 
generally happens, the amount in the treasury is inade- 
quate to meet the wants of all those who wish to borrow, 
the loan is usually awarded to the man who will, directly 
or indirectly, offer the highest interest. The board of 
managers is charged with the duty of seeing that the 
money is invested in a safe and secure manner. The 
workman pays, besides interest, his monthly subscription 
to his shares. If he keeps up these payments regularly, 
he will in a few years find himself in the possession of 
paid-up shares which will cancel the principal of the debt 
when it becomes due and leave him owner of his house 
without incumbrance. 

§ 435. Great as are the advantages of these societies, 
they are of quite a different character from those with 
which they are popularly credited. They do not, as a 
rule, enable a workman to get a home cheaper than he 
could obtain it without them. The borrowers in these 



BUILDING SOCIETIES. 389 

societies, in competing for loans, are tempted to offer un- 
duly high premiums. The chief commercial profit of such 
societies goes to the outside investors, who do not intend 
to borrow. It will generally happen that the workman 
who puts money in a savings bank until he has a suf^cient 
amount to pay part of the cost of a home, and then bor- 
rows the remainder from the savings bank, with the view 
of gradually paying the debt from year to year, gets his 
house at less expense than he could through membership 
in a building society. The cooperative society undoubt- 
edly stimulates many workmen to save who otherwise 
would not ; but this advantage is offset by the danger 
that in case of sickness such compulsory saving, instead 
of helping a man, will weigh him down by a burden too 
heavy to bear. What these societies do for the public is, 
first, to lead workmen to become holders of real estate 
much sooner than they otherwise would do, and second, 
to teach them the difficulties and the possibilities atten- 
dant on the conduct of banking business. Both of these 
things are of great public value. The man who owns real 
estate becomes thereby a gainer in happiness and self- 
respect. Even if it involves effort and self-denial, the 
" magic of property " lightens the burdens and sacrifices 
involved. And besides the moral gain to the real-estate 
owners themselves, there is an equally important gain to 
the community as a whole in having the ownership of 
lands and houses widely distributed among its members. 
It puts a larger number of citizens on the side of law and 
order, in opposition to the destructive tendencies of 
modern industrial life. It makes them acquainted with 
business methods and with the responsibility of business 
control, and thus lessens the danger of reckless financial 
legislation and the possibihty of any political warfare of 
classes. It is in this educational influence that building 
societies have their chief value. When this is absent, the 
form of cooperative organization has no virtue. The so- 



390 COOPERA TION. 

called national associations, which simply provide a means 
of investment and borrowing without direct personal con- 
trol, are always a source of danger and often of serious 
evil. The recent history of building societies in England, 
as well as in the United States, has furnished conspicuous 
examples of the abuse of cooperative forms of enterprise, 
and emphasizes the necessity, of direct control by the co- 
operators themselves, as an essential condition for secur- 
ing the benefits of the system. 

§ 436. By far the most important form of consumers' 
cooperation is exemplified in government management of 
industrial enterprises. This differs in two important par- 
ticulars from the cooperative agencies already described. 
In the first place the choice of managers of a government 
business enterprise is connected with the general political 
machinery of the country, and regulated by constitutional 
law instead of by statutes of incorporation. In the second 
place, these managers are likely to fall back on the taxing 
powers of the government to make up any deficit which 
may arise in the operations of a public business enter- 
prise ; or in the converse case to devote any surplus above 
expenses to the relief of tax burdens elsewhere. A 
government enterprise is managed by people who repre- 
sent, or are supposed to represent, the consumers ; but the 
good or bad economy of its management does not neces- 
sarily redound to the profit or loss of those who most 
use it.' 

It is impossible within the limits of a book like this to 

^ It is sometime said that public business management is neither more nor 
less than compulsory cooperation. But it must be noted that the compulsion 
is exercised against the taxpayers in general, rather than against the con- 
sumers of goods or services provided. Where is the compulsion applied in 
the management of a government railroad ? Not in compelling people to 
use the road, but in compelling taxpayers to make up any deficit which 
arises in its operations. Of course the government may exercise an indirect 
compulsion upon the users of railroads, if it prohibits the building of private 
lines, and thus forces people to use its services or none at all ; but this is 
an accidental rather than a universal feature of state railroad management. 



HISTORIC FUNCTIONS OF GOVERNMENT. 39 1 

examine in detail the successes or failures of government 
management of industry in the various lines where it has 
been tried. But it seems both possible and desirable to 
group together the general causes which have given force 
to the demand for such management in some directions 
and have limited its practical usefulness in others. 

§ 437, In the beginning of history, the government is 
the power that controls the army. When tribes were in a 
state of warfare with one another, defense against foreign 
enemies was the matter of primary importance. No man 
could let his private convenience stand in the way of 
effective military operations. The discipline and subordi- 
nation necessary to wage successful war were all-important ; 
and all the powers necessary to maintain such discipline 
were entrusted to the leaders of the army. 

Somewhat later the military authorities undertook the 
work of maintaining discipline in time of peace as well as 
of war, and of defining and enforcing the rights of mem- 
bers of the tribe against one another, no less than against 
foreign enemies. This function was not accorded to them 
without a struggle. The priests, under whose tutelage 
the religious sanction for tribal customs had grown up, 
tried to keep in their own hands the responsibility of up- 
holding these customs and the physical power connected 
with it. In some races they succeeded ; but among Euro- 
pean peoples the military authorities took the work of 
enforcing and defining laws out of the hands of the priests, 
and made it a function of the state as distinct from the 
church. As security from foreign enemies increased, this 
law-making power became more and more important. 
The government was less exclusively identified with the 
army, and more occupied with the courts, the legislatures, 
and the internal police. Its judicial and legislative func- 
tions assumed a prominence at least as great as its 
military function. 

The growth of private property was almost coincident 



392 COOPERA TION. 

with the development of these domestic functions of gov- 
ernment. In fact the two things reinforced one another. 
The production and accumulation of capital, to which 
private property gave so vigorous an impulse, placed the 
strong men of the community in a position where they 
had less to gain by war and more by peace. It put them 
on the side of internal tranquility. It thus made the 
government more powerful ; and this in turn still further 
increased the accumulations of capital. But along with 
this mutual help, Avhich strong domestic government and 
strong property right rendered one another, there was an 
element of mutual antagonism. The very fulfilment of 
those functions which made the accumulation of capital 
possible, rendered it impossible for the government to do 
its work except at the expense of the capitalists. It was 
no longer possible to support armies by booty, or courts 
by fines and forfeitures. The expense of maintaining 
order had to be paid by its friends instead of its enemies. 
The growth of private property was followed by the 
development of a system of taxation, which, in theory at 
any rate, involved the power to destroy such property. 

The existence of such a system of taxation, with the 
machinery for collecting money in this way, allows the 
government more freedom of industrial action than any 
private individual can command. It can make up a de- 
ficit by compulsory payments ; and this gives it a wider 
range of power in deciding what services it will undertake 
and what prices it will charge — a power which affords 
almost unlimited opportunity for good or bad use, accord- 
ing to the degree of skill and integrity with which it is 
exercised. 

§ 438. Every extension of government activity into 
new fields restricts private enterprise in two ways; first 
by limiting the field for investment of private capital, and 
second, by possibly, if not probably, appropriating through 
taxation a part of the returns from private enterprise in 



SPHERE OF GOVERNMENT ACTIVITY. 393 

all other fields. The question whether a government 
should manage an industry reduces itself to this: Are the 
deficiencies or evils connected with private management 
such that it is wise to give government ofificials the taxing 
power which constitutes the distinctive feature of public 
industrial management? 

§ 439. In one class of cases there is no doubt whatever. 
The expenses for the army, the courts, and the legislature, 
with the administrative work which they involve, must be 
defrayed in this way. There may be a question how large 
an army and navy we should have, or how much legisla- 
tion ; whether we should extend legislative activity to 
cover a great many points of health and morals, or confine 
it as far as possible to a few essential matters of public 
security. But once having established an army or made 
a law, we have to pay for it by taxation. We have to 
meet the cost not only of soldiers and sailors, but of forts 
and ships ; not only of congressmen and judges, but of 
policemen, prisons, and other physical means necessary to 
make their decisions operative. Every extension of legis- 
lative power extends the scope of these expenditures. 
Regulation of money almost necessarily involves public 
mints; health ordinances involve public sanitation ; com- 
pulsory education involves public schools. All of these 
agencies may be partly supported by fees for the services 
rendered ; but their compulsory character involves the 
necessity of applying them in cases where the collection 
of an adequate fee is impossible. 

§ 440. This last point leads us to the fundamental 
characteristic of a second class of circumstances which 
justify goverment enterprise. It will often happen that 
an expenditure of m.oney promises a public good out of 
all proportion to the amount which its promoter can col- 
lect from the beneficiaries in case it proves successful. 
Under such circumstances the government may take hold 
of an industry, just because it cannot be made to pay by 



394 COOPER A TION. 

ordinary commercial means. Roads, bridges, canals, 
wharves, and lighthouses furnish conspicuous instances 
of this sort. It is an absolute necessity for the public to 
have lighthouses ; but it is, in ordinary cases, impossible 
for the owner of a lighthouse to collect toll for its main- 
tenance, either from the ships which are not wrecked or 
from those which are. It is of the utmost importance 
for the community to have good roads ; but the vexation 
connected with the imposition of tolls for the use of the 
highway, and the impossibility of maintaining a highway 
system by such tolls, force the government to take this 
matter into its own hands. 

Irrigation works in desert lands are likely to furnish 
another important example of this kind ; especially if it 
be true that the storage and distribution of water pro- 
duces a rainfall in districts previously arid, so that those 
who pay nothing for the works can nevertheless get a 
share in these benefits. An instance of a little different 
character, but which comes under the same general head, 
is furnished by forestry. The public need of forests for 
the sake of securing a regular rainfall is one in which the 
whole community has an interest, but which is not a 
matter of personal profit to any one. Each man will, 
therefore, often destroy his own forests for the sake of 
the lumber, and trust to others to leave theirs for the 
sake of the rainfall. In a case like this, government 
interference has been abundantly justified. 

§ 441. In supplying these needs, the government serves 
a public necessity. But there are two opposite causes 
which often prevent it from doing its work judiciously. 
Either the taxpayers know that they are paying for these 
improvements, or they do not. If they know it, as in the 
case of country roads, they will grudge every penny of 
necessary expense, and will waste in horseflesh and 
wagon-wheels many times the amount of capital which 
would have sufficed to put the road system in proper 



MISTAKES IN PUBLIC EXPENDITURE. 395 

shape. Seeing no pecuniary return for the money which 
they spend, they will cause themselves great pecuniary 
loss by their shortsighted economy. If, on the other 
hand, the taxpayers do not see whose money is being 
spent, as in the case of ship canals and other works of 
national importance, they will look only at the question 
of convenience, and will fail to see that somebody must 
pay for this convenience by taxation. They will commit 
the fallacy of confounding government property with 
public wealth, and will ignore the fact that unwise ex- 
penditures on government property lessen the public 
wealth instead of increasing it. 

The danger of this mistake is intensified by the fact that 
so many people believe the expenditure of money to be 
in itself a positive benefit, without considering the source 
whence it is drawn ; and are ready to make appropria- 
tions for objects of slight value, because they can see the 
money which is spent and cannot see the losses involved 
in collecting it.^ The history of river and harbor improve- 
ments has often been a public scandal. Some of them 
are recklessly made, without the remotest prospect of 
permanent benefit to any one. Others, which promise a 
benefit, are begun without anything like a careful esti- 
mate of the probable cost. Many an advocate of canal 
projects claims that a canal is a cheaper means of trans- 
portation than a railroad ; basing his argument on figures 
which include interest and maintenance in the expense of 
railroad transportation and exclude interest and main- 
tenance from the cost of canal transportation. The com- 
parison is made in this fashion because the government 
habitually pays interest and maintenance on the canal, 

^ This danger is by no means confined to expenditures for industrial enter- 
prises. It is exemplified in the demand for pensions of various forms 
(compare § 75). In the United States there is a strong pressure toward 
regarding military and naval pensions not as a means of support to those 
disabled in the service of the government, but as a means of distributing 
public money as widely as possible among private individuals. 



396 COOPERA TION. 

SO that this is supposed to be no part of the expense of 
the shipment. But it represents a cost to the pubHc just 
as much as if it were paid by private individuals, and 
any legislation which ignores this element of cost is 
blindly increasing public burdens. 

§ 442. A third class of cases brings us into much more 
doubtful ground. There are many enterprises whose con- 
trol by private individuals or corporations seems to give 
those individuals or corporations an arbitrary power over 
the industrial interests of the country ; which forms a 
menace to public wealth, and destroys whatever presump- 
tion may exist in favor of private control of industry. 

Let us see what constitutes the real basis of this 
presumption. 

Each consumer probably knows better than any one 
else whether he wants an article enough to pay a specified 
price for it. Each producer presumably knows better 
than any one else whether he can do a thing cheaply 
enough to meet the consumer's wants. Competition 
allows any man to get an article if he is willing to pay the 
the market price for it, and offers inducements to any man 
to make an article if he can do it for less than the market 
price. In so doing, it at once puts goods where they 
are wanted, makes every producer do his best work, and 
stimulates progress by giving every incentive for new 
methods. Even if many mistakes are made in trying 
these new methods, the gain to the community from 
the permanent application of those that succeed out- 
weighs the loss from the immediate cost of those that 
fail. Finally, the rivalry of different producers causes 
them to sell their products at low rates, and gives the 
benefit of new methods to the consumers as a body 
instead of allowing it to be appropriated by a few 
capitalists. 

But it is obvious that these advantages are largely, if 
not wholly, dependent upon the existence of free compe- 



PUBLIC OWNERSHIP OF MONOPOLIES. 397 

titioii/ In the case of a monopolized industry, the chance 
for experiments is less wide, the stimulus to producers* 
energies less effective. Instead of putting prices so low- 
as to bring the product within reach of every consumer 
who can pay the cost, a monopoly may use its power to 
fix unfairly high rates, thus increasing its own profits but 
lessening the sphere of its public service. This danger is 
present to a noticeable degree in the case of waterworks, 
of lighting, whether by gas or electricity, and in many of 
the industries occupied with the conveyance either of 
intelligence, of passengers, or of general traffic. It is hard 
to avoid these dangers by legislative control of rates, 
owing to the inherent difficulty of allowing anybody to 
fix the charges for a service except those who risk their 
own capital in so doing. If the government allows cor- 
porations to make unduly high charges, it subjects the 
public to the danger of extortion. If it insists on their 
making charges which turn out to be unfairly low, it de- 
prives the investors of the control and enjoyment of their 
property. Why should it not meet the difficulty directly, 
by owning and managing these enterprises, and making 
changes in rates with a free hand, at its own fisk ? 

The answer to this question will depend partly on the 
industry involved, and partly on the financial ability of 
the government which seeks to take control. 

§ 443. The criteria laid down by Jevons^ to determine 
when an industry can advantageously be managed by the 
government, are as follows : 

I. Where numberless widespread operations can only 
be evenly connected, united, and coordinated in a single 
all-extensive government system. 

' H. C, Adams says that the presumption in favor of private control is 
lessened if not destroyed w^here the "law of increasing return " holds good. 
But we have seen (§ 168, note) the danger involved in making too much of 
this distinction. 

^ " Methods of Social Reform," p. 279. 



398 COUPE J? A TION. 

2. Where the operations possess an invariable routine- 
like character. 

3. Where they are performed under the public eye, or 
for the service of individuals who will immediately detect 
and expose any failure or laxity. 

4. Where there is but little capital expenditure, so that 
each year's revenue and expense account shall represent, 
with suf^cient accuracy, the real commercial conditions 
of the development. 

All this is good as far as it goes ; but it leaves the heart 
of the difificulty untouched. Passing over the first of 
these points, which really begs the whole question, we 
have before us, not an indication of the conditions under 
which a government can manage an industry with the 
best advantage, but of those under which its management 
is attended with the least danger. Jevons's principles are 
restrictive and not positive. They show how far you can 
trust the government without serious danger of financial 
mismanagement. Assuming the existence of a political 
or fiscal motive for extending the sphere of official action, 
these criteria show in which direction such an extension 
can be made with the least probability of loss and corrup- 
tion.' Judged on this basis, waterworks form an excel- 
lent field for municipal activity, gas works a more doubt- 
ful one, and electricity in its various applications quite an 
unsuitable one. For the national government, these con- 
ditions indicate that the post-office is suitable as a field 
of employment, the telegraph a little more doubtful, and 
the railroad much more conspicuously so. Unfortunately, 
these criteria as a rule apply best where the initial neces- 
sity for government ownership is least. They indicate 
that the government may properly own industries where 

' Even on this restricted basis, a fifth criterion should be added to those 
of Jevons : namely, that the public management has special advantages 
where the government is itself a large consumer, as in the case of municipal 
water supply, so that questions of price will be looked at by the financial 
authorities from two points of view. 



A CHOICE OF EVILS. 399 

it could easily enough regulate a private company, and 
may not so properly control industries where it is difficult 
to regulate a private company. With regard to the rela- 
tive merits of the two systems, administrative ownership 
or legislative control, in a really perplexing case like rail- 
roads, Jevons's principles furnish us no help. Just where 
the difficulties attendant upon private ownership are great- 
est, these tests shut the door most hopelessly against 
state purchase, and leave us no alternative whatsoever. 

§ 444. In an industry like the railroad, both private 
ownership and state ownership, even under the best of 
circumstances, are likely to be attended with a great deal 
of dissatisfaction. Neither system is free from serious 
abuses. The choice between the two is in some measure 
a choice of evils. Under private ownership we have 
rapid development of effective methods and processes, 
and a high degree of industrial efficiency ; but side by 
side with this we have great discriminations and fluctua- 
tions in rates, which no system of legislation seems able 
to keep within bounds. If the government owns all the 
railroads of a country it will meet many of these difficul- 
ties about rates. It will make them steady, and as a rule 
low. To offset these advantages, it will give a service 
which, to a country accustomed to the freer system 
of private management, will seem seriously defective. 
Germany furnishes a most conspicuous example of a well 
managed state railroad system. The rates of the German 
railroads are on the whole quite satisfactory. But the 
amount of train service in proportion to the population, 
and the quickness of the trains themselves, whether for 
passengers or freight, are, according to English and 
American standards, miserably inadequate. 

§ 445. On the whole, private ownership of monopolies 
tends to rapid development and utilization of improve- 
ments. With all the talent that has been put into the 
public administration of industry it is a salient fact that 



400 COOPER A TION. 

the important inventions have been made in countries 
enjoying private enterprise. The telegraph, the tele- 
phone, the electric light, the railroad track, the locomo- 
tive, the air brake, the block-signal system, were all 
introduced by private companies. In most cases it took 
government experts from ten to twenty-five years to dis- 
cover them after they had been in successful use on pri- 
vate lines. We also find that the efficiency and quantity 
of service is generally higher than we see it under govern- 
ment management. In spite of the ability of the Prussian 
civil service the fact remains conspicuous that England 
and America have more trains in proportion to the popula- 
tion than Prussia, and that they run them faster.' 

§ 446. With regard to the relative effect of state and 
private ownership in making prices high or low, no general 
propositions can be maintained. The United States and 
England are the two most conspicuous examples of 
countries that have private railroads. The United States 
has the lowest freight rates of any important commercial 
country in the world. England has the highest. In 
either case, if we go below the surface, we find reasons 
for the conditions that prevail. The long hauls of cheap 
freight give the American railroads an opportunity to 
reduce rates, of which they have been quick to avail them- 
selves. In England just the opposite conditions prevail, 
and the opposite results naturally follow. On the other 
hand, the high American passenger rates are fully ex- 
plained by the small density of population and the high 
average earning power, which make it worth while for 
passengers to pay high rates in order to have trains run 
when they want them. The same kind of explanation 
accounts for most of the glaring differences in charge for 

' If the government protects private companies from competition these 
advantages of private enterprise do not make themselves felt. The French 
railroads, which enjoy a guaranteed monopoly, stand in about the same con- 
dition as the state-owned roads of Germany, with regard both to train service 
and train speeds, besides charging rather higher rates. 



TJVO OPPOSITE DANGERS. 401 

telegraph service, lighting, and other objects of industrial 
monopoly, which are adduced by extreme partisans either 
of state or of private ownership as arguments for their 
respective views. 

§ 447. Both the advantages and the dangers of govern- 
ment management of industry depend largely upon the 
form of the government itself ; while the possibility of 
securing the one and avoiding the other is largely depen- 
dent upon the character of public men and methods. 

In a country like Prussia, where the military element 
of the government remains the dominant one, we may ex- 
pect to find public enterprises managed with strict disci- 
pline, good economy — at any rate in the narrower sense of 
the word, — and freedom from glaring abuses. The chief 
errors of such a government come from not responding 
quickly to the needs of industrial progress. It is apt to 
be slow in utilizing improvements or making changes of 
method : while there is always a danger, which only the 
best governments are able to avoid, that the monopoly 
will be used to tax the public instead of to help it. 

In a government where the legislative element is more 
prominent, and especially in a democratic one, the case 
is reversed. Such a government prides itself on respond- 
ing to popular needs. Its legislators are chosen to give 
expression to the public will, and too often pride them- 
selves on their subserviency to the people. Under such 
conditions we are likely to have reductions in rates to the 
lowest limit which a regard for the budget will allow, and 
activity in making obvious improvements and popular 
changes of method. On the other hand we are in the 
gravest danger of sacrificing discipline and economy, and 
of making subserviency to the popular will a cloak to 
cover abuses of trust and violations of commercial 
honesty. 

§ 448. The chance of securing the advantages and 

avoiding the evils of either form of government is better 
26 



402 COOPERA TION. 

in a municipality than in a nation. For the municipality 
is neither a military body nor in its main functions a legis- 
lative body, but an administrative one ; and while the 
character of the administration chosen is likely to reflect 
in some measure the traditions of the central government, 
there is no necessary connection between the two. More- 
over, the responsibility for the success or failure of munici- 
pal administration is less hopelessly obscure than is apt 
to be the case with national administration. This being 
the case, the chance for successful and economical control 
of enterprises by municipalities is better than the chance 
under national authorities. 

§ 449. If any government agency, local or national, is 
to be entrusted with the management of an industrial 
enterprise, a non-partisan civil service is absolutely essen- 
tial for success. Even in so simple a case as the post 
office, the abuses of patronage have been great, and only 
the enforced monopoly of the government which shuts 
out private competition in letter carriage prevents us 
from seeing how great is the waste which arises from this 
source. Much more must this danger make itself felt in 
industries with large capital accounts. Only where the 
traditions of the civil service are such that the best men of 
the country seek and gain admission to it, independent 
of party, can we hope that the advantages from govern- 
ment management of these industries might outweigh the 
evils. With the conditions as they exist in the United 
States, political reasons compel us to reduce government 
•ownership of fixed capital to a minimum. Any exten- 
sion of party patronage to a new, lucrative, and complex 
field must involve serious dangers to the already inade- 
quate powers of our Civil Service Commission. The 
Italian authorities fifteen years ago, after the fullest in- 
vestigation, came to a decision adverse to government 
management of railroads ; and this decision was based 
largely on the ground that politics would corrupt the 



INDUSTRY AND POLITICS. , 403 

railroad management and the railroad management would 
corrupt politics. So long as an administration is to any- 
considerable degree swayed by partisan considerations 
instead of industrial ones, every extension of government 
activity to new fields must be regarded with grave appre- 
hension. 



CHAPTER XIII. 

PROTECTIVE LEGISLATION. 

The Eight-Hour Movement — The Contract System — Prison Labor — Foreign 
Immigration — Protective Tariffs — The Popular Argument — The De- 
velopment of Infant Industries — Political and Military Questions 
Involved. 

John Rae : "Eight Hours for Work." London, 1894. 

R. Mayo-Smith : " Emigration and Immigration : a Study in Social 
Science." New York, 1890. 

Leone Levi : " The History of Commerce and of the Economic Progress 
of the British Nation, 1763-1S78." London, 1880. 

F. W. Taussig: "The Tariff History of the United States." 2d ed. 
New York, 1892. 

No student of the theory of protection should fail to read the fourth book 
of Smith's Wealth of Nations. The more recent controversial literature on 
the subject is almost as disappointing as that on bimetallism 

§ 450. It is a natural consequence of the popular doc- 
trine of wages (§ 344) that its adherents try to make 
use of legislative authority to diminish the apparent over- 
supply of labor ; sometimes by forced reductions of hours, 
sometimes by prohibiting the employment of certain 
classes of laborers, sometimes by restricting the importa- 
tion of foreign products with a view to the creation of new 
fields for home industry. They see that the different 
workmen in an industrial community compete with one 
another ; they fail to see that they consume one another's 
products. In consequence of this one-sided view, they 
favor almost any policy that reduces the intensity of com- 
petition among workmen as producers, even though it 

404 



REDUCTION OF HOURS. 405 

may ultimately reduce the amount of wealth that can be 
divided among the workmen as consumers. 

As a result of this fallacy, even the most wholesome 
measures are defended on false grounds. There is a dis- 
position to find the reason for prohibiting child labor, 
not in its real effect on the health and morals of the com- 
munity, but in its supposed effect in diminishing the 
employment of adults ; to seek grounds for the restric- 
tion of foreign immigration, not in the political dangers 
attendant upon it, but in its industrial consequences in 
taking away the bread from home labor ; to argue for 
shorter hours of labor, not as a means of improving the 
quality of the operatives, but as a means of giving work 
to a larger number of hands. 

§ 451. The advocates of the eight-hour movement gen- 
erally hold that a restriction on the quantity produced 
by each individual laborer places the laborers as a class 
in a better position to bargain with those who desire to 
employ them. They believe, or at least imply, that a 
diminution in the supply of labor by legislative enact- 
ment tends to increase the competition of capitalists for 
the laborers' services. They claim that enforced reduc- 
tion of hours of work would create (i) a demand for the 
labor of men who are now unemployed, and (2) an in- 
crease in the price of work per hour, which would enable 
those who were previously working ten hours to get the 
old rate of wages for eight hours' work instead of ten. 

§ 452. This course of events is most improbable. The 
proportion of the unemployed is not likely to be dimin- 
ished by a forced reduction in the hours of labor. Among 
the many causes of " unemployment," the two most im- 
portant are the shiftlessness of individual laborers and 
the fluctuations of commercial credit. The first of these 
causes would not be affected by legislative reduction of 
the hours of labor ; the second would, for the moment at 
any rate, be adversely affected. The experience of France 



406 PROTECTIVE LEGISLATION. 

after the revolution of 1848, indicates that a sudden 
change in conditions of employment, devised in the in- 
terest of the laboring classes, may so far paralyze credit 
as to increase the proportion of the idle rather than to 
diminish it. 

If the number of the unemployed remains approximately 
the same and the product of the employed diminishes as 
a result of the reduction of time, a loss in real wages is 
apparently inevitable. The margin of profit in modern 
industry is so narrow that any considerable gain made by 
the laborers at the expense of the capitalists so far di- 
minishes the investment of capital in the immediate 
future as to hurt the laboring classes in the long run 
more than it helps them for the moment. This would 
be the obvious effect if one nation adopted the system 
and its competitors did not. For this reason, many 
advocates of the eight-hour movement are disposed to 
insist that it should be made an international measure, 
and that if any nation should refuse to take part in apply- 
ing it, other nations should defend themselves against the 
recalcitrant by imposing discriminating duties upon its 
products. 

This removal of international competition puts the dif- 
ficulties of the eight-hour movement a little way out of 
sight ; it does not by any means meet them. No inter- 
national arrangements or protective tariffs will make one 
loaf of bread serve the purpose of two. An eight-hour 
law either applies to agriculture, or it does not. If it 
applies to agriculture, it will make food products scarce. 
Any one who is inclined to doubt this will soon be con- 
vinced of its truth if he watches the actual operations of 
farm life.' If food products are scarce, some people will 
surely starve. If, on the other hand, the eight-hour law 
does not apply to agriculture, the city laborers who have 

' If an eight-hour day for farm work was once the rule in England, as 
Rogers thinks, it must have been accompanied by a great deal of overtime. 



EFFECT ON OUTPUT. 407 

hoped to maintain a high price for manufactured pro- 
ducts, or to give work to the unemployed by a restriction 
in the output per capita, will find themselves wofully 
deceived. For if the attractions which now draw men 
from the country to the city are supplemented by a 
shortening of hours of labor which applies to the latter 
and not to the former, we shall have more laborers com- 
peting for the city work, and more supplies of manufac- 
tures to exchange for food. We shall see a larger number 
of laborers working at starvation rates which the strong 
man is not allowed to better by working overtime. He 
must see his children die because the law prohibits him 
from earning the food they need. If this is to be the 
result of the eight-hour movement it may well be termed 
suicidal. 

§ 453. The really strong arguments for reduction of the 
hours of labor are advanced by those who do not believe 
that the product of labor will be greatly diminished by 
such a policy. There is much that they can urge in sup- 
port of this view. They can show that in times past the 
gradual reduction of the working day, from twelve and 
thirteen hours to ten or nine, has not caused the ex- 
pected diminution of output. A shortening of the dura- 
tion of labor has been accompanied by increased speed, 
which very soon brings the per capita production up to 
the old level. 

Shortened hours combined with increased speed make 
the conditions of employment more favorable for high 
grade labor and less favorable for low grade labor. The 
better laborer does not dislike the speed and enjoys the 
time saved. Where one country or state has reduced the 
hours of labor, while another has retained the longer 
working day, there has been a noticeable differentiation 
of the character of the employment in the two localities. 
There was a time when, as a result of legislative enact- 
ment, Massachusetts mills were running ten hours a day,, 



4o8 PROTECTIVE LEGISLATION. 

while Connecticut mills were running eleven hours. This 
did not mean that mill hands in Connecticut earned higher 
wages than those in Massachusetts, or made more pro- 
ducts ; nor did it mean that Connecticut mill owners 
earned larger dividends. The Massachusetts mills ran at 
greater speed, employed a higher character of operatives, 
produced on the whole a higher grade of goods, and 
earned a fair rate of profit in so doing. The Connecticut 
mills ran at lower rates of speed, and employed operatives 
of somewhat lower grade than those of Massachusetts, at 
no higher rates of wages to the laborer or profits to the 
employer. 

It may fairly be asked why the reduction of hours, if it 
involves no loss of profit, may not be left to the voluntary 
action of the employer. The answer is this: Industrial 
history has proved that employers are not, as a rule, ready 
to take the initiative in these reductions. The unen- 
lightened members of the employing class are often able 
to dictate the policy of the whole body in this matter. If 
the employees were united in a universal strike in the 
whole trade, for the sake of reduction of hours, they could 
force a compliance with their demands ; but such a result 
could only be accomplished at great sacrifice to the com- 
munity as a whole, and in many trades a minority of un- 
intelligent employees could defeat the change altogether. 
Under these circumstances, recourse must sometimes be 
had to legislative enactments. 

§ 454. For success in legislation of this kind it is 
necessary that the prescribed reductions be moderate in 
amount, keeping well within the limits of what the public 
sentiment of the community will sustain. Otherwise, any 
statute becomes a dead letter. The eight-hour law of the 
United States is a monumental instance of failure. To be 
successfully applied, a law reducing hours of labor must 
be strictly mandatory and not permissive or optional. 
The conditions under which overtime is to be allowed 



TRADE OPTION. 4O9 

must be accurately defined ; and the provisions of the law 
on this subject must be enforced, even in cases where its 
enforcement involves hardship. It is fatal to the success 
of an act if public sentiment justifies individuals in taking 
the matter of exceptions into their own hands. The 
Fabian Society of England, in its advocacy of the eight- 
hour day, seems inclined to be satisfied with a law based 
on the principle of trade option. Such a law would pro- 
vide that where it is proved to the satisfaction of a Secre- 
tary of State that the majority of persons employed in 
any one trade favors a statutory reduction in the hours of 
labor, this may be made the basis of an order for such 
reduction. There seems no great reason to apprehend 
much evil from the adoption of a policy of this kind, in a 
country where workmen are at once so well organized and 
so well educated as in England. The danger that a good 
workman will voluntarily cause a reduction in his earn- 
ings for the sake of shortening his working hours is not 
very serious. But it must constantly be borne in mind 
that reductions of hours, even more conspicuously perhaps 
than other forms of labor legislation, bear heaviest, not 
on the employer, not on the man who has money to 
spend, but on the labor of those who cannot stand the 
increased speed and are therefore forced to a choice 
between a lower standard of comfort or an intensity of 
strain which they cannot bear, 

§455. The argument for restricting the employment of 
certain classes of labor is obviously far stronger than that 
for general restrictions on the labor supply as a whole. Pro- 
hibition of child labor is unquestionably justified on public 
grounds, because, if the children go to work in the factory 
at too early an age they are deprived of the chance of health 
and education which would enable them to make the most 
of themselves. The community is not always better off 
for the moment, from keeping them out of the mills ; but 
it is far better off in the long run from having strong citi- 



4IO PROTECTIVE LEGISLATION. 

zens instead of weak ones. The gain to the laborers from 
such a policy is to be sought not in the momentary reduc- 
tion of the labor supply, but in the ultimate increase 
of that supply as the children grow to a more ef^cient 
manhood. 

§ 456. It is very hard to tell at what age the prohibition 
of child labor should cease. If a boy of thirteen or four- 
teen is strong enough to earn his living, his gain from the 
food and other comforts which he earns, is probably 
greater than his loss from confinement at his labor. In 
cases like this, the harm from keeping him out of work 
is likely to outweigh the good. The same difiliculty in 
even more perplexing shape is involved in the regulation 
of women's labor. There are many women who work for 
lower wages than those which men in corresponding em- 
ployments are willing to accept. Some of them live in 
homes where they are supported by their parents, and 
where any income which they may earn represents an 
addition to the family income. Others have families 
dependent upon them and are ready to kill themselves 
rather than see their children starve. Each of these 
classes contributes to the increase of the labor supply in 
certain lines, and allows wages in those lines to fall below 
the figure necessary to keep the laborer alive. Men will 
not, as a rule, take these low wages. They are not 
allowed to remain in dependence on their parents ; they 
will not go as far as women in killing themselves for the 
sake of their children. They have a standard of wages 
which they insist on receiving ; in default of such wages 
they will take to the road. Hence the decided difference 
between the recognized minimum of wages for the two 
sexes.' 

As long as reckless marriage remains the rule, it is hard 

' Smart ( " Studies in Economics " ) explains this difference on tlie theory 
that men have been strong enough to secure industrial gains which modern 
competition offers them, while women's wages reflect the industrial con- 
ditions of a hundred years ago. 



WOMEN'S WAGES. 41I 

to see an escape from this state of things. To forbid a 
mother to work while her little children starve is out of 
question. To have the taxpayers assume the support of 
all such cases would result in placing new burdens upon 
a number of workers who find it hard enough to maintain 
themselves at present (compare § 59). The attempt to 
raise women's wages, either by combination or by law, to a 
figure equal to those of men, would apparently so dimin- 
ish the demand for their labor as to leave many with 
nothing to do. Nor could any reduction in the hours of 
female labor make work enough to supply all the com- 
petitors at remunerative rates. A certain amount of re- 
striction on the labor of women, especially married women, 
seems necessary on grounds of public health ; but the grow- 
ing pressure to equalize the legal position of both sexes 
is likely to reduce such special legislation to a minimum 
rather than to allow it to expand into an important limita- 
tion of the labor supply. 

§ 457. A more distinct case for public interference is 
found in the low wages which prevail under the ''sweat- 
ing system." 

An employer who desires to get his work done as 
cheaply as possible, and at the same time to free himself 
from the trouble of supervising it, will often make con- 
tracts with his subordinates by which he furnishes them 
whatever materials they may need, and pays them a stipu- 
lated price for their product, after deducting the cost of 
the materials used. Where this contract is made with the 
workmen as a body, the system is a good one. It gives 
them a stimulus to use the materials effectively and 
economically. Where it is made with an individual 
workman, or subcontractor, who hires his help at whatever 
rates he can persuade them to accept, its benefit is more 
doubtful. It is good for the employer and the subcon- 
tractor; but the men themselves claim that the work is 
harder and the pay more niggardly than when they are 



412 PROTECTIVE LEGISLATION. 

hired by the capitalist directly. They complain that 
when every penny saved in the workrooms goes to the 
foreman — which is what the subcontract system accom- 
plishes —his supervision is so intense and his bargaining 
so close as to make the lot of those under him a hard one. 
But as long as the labor is performed in the factory itself, 
the system does not develop its worst features. These 
are shown when the work is done outside, in isolated 
shops or in tenements which some people are so unfortu- 
nate as to call homes. This method of employment is 
known as the sweating system. It is perhaps seen at its 
worst in the ready-made clothing trade, where the length 
of the hours, the shortness of the wages, and the unsani- 
tary conditions of the employment combine to form an 
appalling picture. 

§ 458. The evils of the sweating system, by which the 
contractor makes money from the misery of those below 
him, are made the ground of a severe indictment against 
free competition. Yet the sweating system is really an 
illustration of the evils which arise from the absence of 
competition, not from its presence. Put people in a 
factory where there is a market rate of wages and they 
obtain the benefit of the modern competitive process. 
Leave them isolated and they become the victims of the 
employer's shrewdness in bargaining. We hear much said 
about the advantage of the capitalist in his competition 
with the laborer. The capitalist does not compete with 
the laborer. Laborer competes with laborer and capitalist 
with capitalist. Where competition exists, the laborer 
gets the benefit of a market rate made by different capi- 
talists. Their strength is a source of benefit to him. It 
is where competition does not exist, and bargaining takes 
its place, that the relative weakness of the laborer makes 
itself felt. The absence of competition in wages gives 
rise to oppression as unjustifiable as that which arises 
from the absence of competition in loans : and laws for 



THE SWEATING SYSTEM. 413 

the protection of the laborer in these cases may have the 
same justification as those for protecting the ignorant 
borrower (§ 155). 

The sweating system is in fact a remnant of the domes- 
tic system of industry which prevailed until the develop- 
ment of the steam engine concentrated so much of our 
labor in factories. It represents a survival into modern 
times of the evils incident to earlier conditions of em- 
ployment ; evils which are doubtless increased by every 
narrowing of the margin of general profits that gives 
the contractor an excuse for correspondingly depressing 
wages, and which are accentuated by the contrast in 
prosperity between those who have gained the benefits 
of competition and those who remain under the severer 
bondage of the older methods. 

§ 459. The evils thus far described can probably best 
be dealt with by the sanitary and educational authorities, 
rather than by special labor legislation. The dangers to 
public health in child labor, in unregulated female labor, 
and in the worst form of contract labor, are so conspicuous 
that proposals for legislative restriction can most effec- 
tively be based on this ground. But there are other 
forms of cheap labor where the evils, real or alleged, are 
more distinctively economic. One of these is convict 
labor. 

In order to relieve the taxpayers of a part of the burden 
of supporting prisoners, it is in many places customary to 
set those prisoners at work for private contractors. There 
are three ways in which this is done. Either the convicts 
are placed directly under the charge of a contractor at a 
fixed rate per day, the contractor taking the responsibility 
for the care of the prisoners and getting all the work he 
can out of them {lease system) ; or labor within the prison 
walls is placed at the disposal of the contractor, at a 
fixed rate per day, the contractor having agents in the 
prison to see that the work is properly carried on {contract 



414 PROTECTIVE LEGISLATION. 

system) ; or the results of the labor are offered to the con- 
tractor at a fixed price per unit of product, the supervision 
being in the hands of the prison authorities {piece price 
system). The first of these methods is undoubtedly the 
worst for the criminals, as it gives all sorts of opportuni- 
ties for abuse. The third is probably the best ; but the 
dif^culty of securing prison supervisors who have at once 
the qualities of good manufacturers and good wardens is 
so great that it prevails less frequently than the contract 
system. The effect of the three systems on outside labor 
is substantially the same. 

§ 460. Convict labor is not a very important matter in 
actual bulk. The number of convicts set at work in the 
United States in 1886 was only 45,000, and their output 
per day was on an average less than half that of free 
laborers. But the effect of this convict labor in de- 
pressing wages may be much greater than that of a corre- 
sponding amount of free labor. There are two reasons 
for this. In the first place, convict labor is pauperized. 
The community pays for its maintenance whether it is 
efficient or not. If one free laborer competes with another 
and his wages fall below the price necessary for his sup- 
port, he ceases to be a competitor. He must die, migrate, 
or find some other occupation ; and his removal enables 
the more efBcient laborer to command a higher price. 
But the supply of convict labor is subject to no such re- 
strictions. If the convict, as is habitually the case, earns 
too little for his own support, the deficiency is made up 
at the taxpayer's expense and the competition continues 
with unremitting vigor. It is a subsidized contest of 
worse elements against better ones. And, in the second 
place, this pauperized labor can be arbitrarily thrown from 
one trade to another, while free labor cannot. An increase 
in the supply of free labor in any particular line is usually 
a gradual one. If free laborers come into a trade in larger 
numbers than usual, we may be almost certain that this 



PRISOA^ LABOR. 415 

trade affords exceptional opportunities for earning money 
and that the laborers already engaged in that trade enjoy 
more than an average share of prosperity. But in the case 
of convict labor we have no such certainty. The manu- 
facturers may employ a large number of convict laborers 
in a trade where the rate of wages offered no special in- 
ducements to free labor and where those who are already 
in the trade suffer severely from the additional supply. 

§ 461. Several remedies have been proposed for this 
evil. There are some who advocate the total abolition of 
prison labor. This would be extremely undesirable. It 
would have a bad effect on the convicts themselves, be- 
cause it would lead to an increase of idleness inside the 
prison walls, and would not leave the prisoner with a 
means of earning a living when he has completed his 
sentence. It would thus make him a permanent burden 
on society, and would increase the probability of his re- 
lapsing into criminal habits from lack of any honest chance 
of supporting himself. It would also have a bad effect on 
the taxpayers. The additional expense of maintaining 
the prison, due to the abolition of the contract system, 
would cause a reduction in the amount of funds that 
would otherwise be added to the capital of the com- 
munity and that would become available for the support 
of free labor in the year following. While the abolition 
of the contract system might thus raise wages in the par- 
ticular trade that had felt its influence adversely, it would 
be almost certain to lower general wages by increasing the 
expenses and lessening the receipts of the community as a 
whole. 

Others advocate the restriction of prison labor to work 
which can be carried on by hand. The prisoner would 
thus be unable to compete with machine labor, because 
he would have less useful appliances at command. The 
objections to this plan differ only in degree from those 
which have been urged against abolition of prison labor. 



4l6 PROTECTIVE LEGISLATION. 

It would not provide the prisoner with a means of liveli- 
hood when he leaves the prison, because he would have 
learned only antiquated methods of work which cannot 
compete with those in use to-day. Nor would it give the 
taxpayers as great a relief from burden as is obtained 
under the existing system. It would therefore involve a 
loss of capital to the community as a whole, which, though 
not so great as that which we should suffer through entire 
abolition of industrial labor in prisons, would nevertheless 
be very considerable. 

Others advocate the retention of prison labor, but pro- 
pose doing away with the contractor altogether. They 
would have the laborers supervised by the prison authorities, 
as under the piece price system ; but instead of selling the 
product to a contractor at a fixed rate they would put it 
on the market at whatever price it could command. This 
method, which is known as the public account system, 
would intensify any evils which result from contract labor. 
It would have an opposite effect from the one intended. 
It would virtually pauperize the capital as well as the 
labor employed. The state would sell the goods for 
what it could get, whether the price covered the expense 
of production or not, — a thing which the contractor can- 
not continue to do for any considerable length of time. 
Where the private contractor for prison labor loses 
money through the low efficiency of prison labor, he ulti- 
mately has to stop business ; but the state, working on 
the public account system, would be subject to no such 
restriction and might continue indefinitely to produce and 
sell goods at a loss. 

It is urged in favor of the public account system that 
the profits now obtained by private contractors would 
accrue to the state. But these profits are for the most 
part illusory. Experience shows that employers of prison 
labor are not conspicuously successful. Its apparent 
cheapness when measured by the day, does not prove 



IMMIGRATIOiY UNDER CONTRACT. 417 

that its results are cheap when measured by the piece. 
The prison laborer at fifty cents a day usually makes less 
than one third as many products as the free laborer at a 
dollar and a half. Only where prison labor is employed 
in work to be used by the government itself, has the pub- 
lic account system proved even moderately satisfactory. 

The best means of guarding against the evils of convict 
labor is to distribute it among different industries in such 
a way that no one trade shall suffer unduly from a sudden 
influx of prison competition. If this matter is attended 
to, the loss to laborers in any particular trade from the 
application of the contract or piece price system is rela- 
tively slight. It is outweighed by the gain to the public 
in utilizing men who would otherwise be idle, and in teach- 
ing the means of earning an honest living to those who 
would otherwise be forced to relapse into a criminal 
career. 

§ 462. The case of immigration under contract bears 
some analogy to that of prison labor. An employer may 
readily import a large number of foreign laborers into a 
trade where wages are not particularly high, but v/here 
he sees an opportunity of utilizing more labor to advan- 
tage. The fact that the employers and not the laborers 
take the initiative in such contracts, makes this case differ- 
ent from that of the ordinary migrations of labor from, 
place to place or trade to trade. It may be argued that 
if the employer can profitably contract for foreign labor 
of this kind, it proves that the country wants such labor. 
But there are a considerable number of instances which 
go to show that the country does not always want such 
labor ; that the private gain to the employer is not 
attended by corresponding gain to the community as a 
whole ; and that, to the laborers already working in the 
trade, the sudden loss, against which they have not had 
time to make provision, may prove a very serious one. 
Advocates of unrestricted immigration say that this loss 



41 8 PROTECTIVE LEGISLATION. 

is one of the incidents of industrial progress, and that the 
laborers are subjected to precisely the same evils by the 
sudden introduction of new machinery. But as a matter 
of equity between different classes of the community the 
cases of immigration and of machinery are not parallel. 
In using new machinery, the employer takes far greater 
risks of failure upon himself. If the experiment proves 
unprofitable, he bears the whole loss. But in importing 
foreign laborers under contract, his loss in case of ill-suc- 
cess is not necessarily much greater than the price he has 
paid for their passage. The community must bear the 
burden of their subsequent support. On grounds of 
economic expediency there is at least a fair case in favor 
of legislation which shall restrict the right of the capitalist 
to import contract labor. 

§ 463. In the case of immigration without contract, the 
dangers are political and social rather than economic in 
their character. The worst form of immigration is that 
which has been " assisted." The authorities in certain 
parts of Europe, either from a wish to get rid of their 
superfluous population, or in the hope of relieving them- 
selves of the support of criminals, paupers, or insane per- 
sons, have in times past sent their undesirable members 
to foreign parts, finding it cheaper to spend a few dollars 
outright in paying their steamship fare than to continue 
supporting them at home. Every community has a right 
to defend itself against immigration of this kind. Down 
to the close of the last century this right was exercised 
with the utmost vigilance. By the English Acts of Set- 
tlement each parish was given protection against the dan- 
ger of assisted migration from neighboring parishes, and 
similar restrictions were applied with much greater sever- 
ity in Continental Europe. The nineteenth century has 
witnessed a reaction against this policy of repressing free 
movements of population ; but the necessity for vigilance 
in these matters has not wholly passed. While the growth 



INFLUX OF FOREIGN RACES. 419 

of international comity may have lessened the danger of 
an influx of foreign criminals, the development of cheap 
transportation has increased the danger of an even greater 
influx of foreign paupers. We have to deal with a large 
number of immigrants who, though not assisted by foreign 
governments, have been induced by false representations 
of agents of the steamship companies to take tickets to 
the United States, although they had no good prospect 
of supporting themselves on this side of the water. The 
laws of the United States against convict and pauper 
labor seem amply justified by the facts, — far more clearly 
so than the contract labor law. 

§ 464. To a popular government large foreign immigra- 
tion, even when otherwise unobjectionable, is attended 
with special evils which arise from the admission of im- 
migrants to political power. When the Irish began to 
emigrate in large numbers in the fifth decade of our 
national existence, a great many good people thought 
that the whole country would go over to Catholicism, 
and that before the end of the nineteenth century the 
Roman Pontificate and the Spanish Inquisition would 
both have their headquarters in New York City. But the 
Irish immigration has been gradually assimilated without 
any revolution or any serious change of institutions. It 
has doubtless increased the difficulties of municipal gov- 
ernment in some of our large cities, but it has not ren- 
dered it impossible for the country as a whole to remain 
self-governing and free. Nor does it seem likely that the 
existing immigration of races of lower grades than the 
Irish is so large as to prevent our country from dealing 
with them successfully. The ability of the United States 
to assimilate foreign elements has proved far greater than 
was anticipated by many observers. But this ability is 
by no means unlimited. Every nation needs to have a 
certain homogeneity of law and morals. It can assimilate 
a certain number of immigrants who have not been 



420 PROTECTIVE LEGISLATION. 

brought up in its own traditions ; but if the rate of such 
immigration becomes too rapid there is danger that the 
old national habits will be destroyed. The more alien 
the thoughts and habits of the immigrant races, the more 
serious is this danger. The agitation against Chinese 
immigration, so far as it was justified at all, was justified 
on this ground. 

§ 465. On purely economic grounds, the case in favor 
of unrestricted immigration is much stronger than people 
commonly suppose. Voluntary and unassisted immigra- 
tion is generally of a pretty high grade. It may be falla- 
cious to compute the value of an immigrant to the United 
States by what it has cost to produce him at home or by 
what it would have cost to produce and train him here ; 
but there can be no doubt that the man who has saved 
money enough and has shown enterprise enough to take 
a journey of three or four thousand miles, has certain first- 
rate qualities that are likely to make him a useful citizen 
to the United States. Though the exhaustion of our 
public land supply is diminishing the immediate and 
visible need for such laborers, we still have enough un- 
used land and unused opportunities to make every able- 
bodied workman constitute an addition to our industrial 
strength. 

Even the immigrants of a lower class, when they are 
not so weak or dependent as to constitute a political and 
social menace to our national life, can render services 
which are of great value to the community. By doing 
the low-grade work they may diminish the chance for 
Americans of low grade to maintain themselves ; but they 
correspondingly increase the opportunities for Americans 
of higher grade. If we get our poorest work done cheaply, 
by men who are able to do it economically, all the rest of 
the country has the benefit of the products of their labor 
at less sacrifice than would otherwise be involved. It is 
hardly fair to say that " the competition that comes 



SOCIAL EFFECTS OF IMMIGRATION. 42 1 

through immigration has the tendency to lower the 
standard of living in this country," or that " the outcome 
of such competition will be to reduce our whole laboring 
class to the standard of life of these newcomers." This 
has certainly not been its outcome in the past. The re- 
sult of the introduction of a number of low-grade laborers 
has been not inaptly compared to the effect produced on 
a pyramid by introducing a new layer at the bottom. 
The pressure at this bottom layer becomes more intense 
than ever before, but the general mass is raised instead of 
being lowered. 

With immigration and with the stimulus which it has 
given to progress by compelling native workers to rise or 
to die, the country as a whole has been rising. It is 
doubtful whether it would have risen nearly as fast with- 
out such a stimulus. The removal of a cause which has 
done so much for our industrial progress in the past 
might well lead to stagnation rather than to higher civili- 
zation. Much of the opposition to immigration comes 
from the men who stand in the way of such progress ; 
men who are incapable of rising into the higher grades ; 
men who, if they work at all, are fitted only for such work 
as foreign immigrants do, and who fail to do that work 
well. There may have been good reasons for putting a 
stop to Chinese immigration ; but the average Chinese 
immigrant, industrious and sober, was far more useful to 
the community at the time and had far more possibilities 
of serving the community in the future, than the average 
persecutor who threw stones at him. 

§ 466. The movement to shut out foreign products by a 
high tariff has generally proved stronger than the move- 
ment to shut out foreign labor by laws regulating immi- 
gration. In restricting immigration the superficial and 
immediate interests of the capitalists have been opposed 
to those of the laborers ; in restricting the importation of 
the products of industry the interests of the two classes 



422 PROTECTIVE LEGISLATION. 

have seemed to go hand in hand. If the legislature 
threatens to prevent the importation of foreign laborers it 
antagonizes the man who wishes to employ them. But 
if it offers to prevent the importation of foreign pro- 
ducts it gives the employer who has money to invest in 
the production of similar goods an interest in behalf of 
the proposed measure fully as great as that of the laborers. 
Therefore many capitalists who have been inclined to op- 
pose laws which restrict the movements of laborers, as 
being violations of the principles of free government, have 
been equally inclined to welcome laws which restrict the 
importation of products, as part of a system of protection 
to home industry (compare § 150). 

§ 467. It is beyond the scope of this book to give any- 
thing like a history of the world's tariff policy. Down to 
the end of the last century protective taxes were accepted 
as a matter of course. The country was fortunate that 
had custom houses on its national borders only, and did 
not find district separated from district by barriers against 
trade. The work of the physiocrats and of Adam Smith 
paved the way for reform in this matter ; the French 
Revolution and the Napoleonic wars, by uniting people 
into larger political groups, helped to bring more liberal 
ideas into play ; while the great English Free Trade 
movement, effectively pressed by Cobden and his friends, 
which culminated in the Sir Robert Peel's Corn Law of 
1846, gave the world an example of radical departure from 
a time-honored method of protective taxation. Napoleon 
III. and his minister Chevalier made a still further pro- 
gress in the same direction, by a system of reciprocity 
treaties devised with the intention of guiding the com- 
mercial world in the direction of freer trade. The United 
States, which had oscillated between high and low duties, 
seemed committed to the latter policy by the undoubted 
success of the tariff of 1847 ^^^ of the Canadian recipro- 
city treaty of 1854. But a general reaction set in when it 



TARIFF POLICY. 423 

was least anticipated. Wars on both sides of the Atlantic 
brought out feelings of national antagonism with unex- 
pected force, and led to the adoption of a tariff policy which 
reflected these feelings. It was first and most conspicu- 
ously exemplified in the United States : where the war 
duties of 1 86 1, 1862, and 1864, originally levied for pur- 
poses of revenue, were allowed to stand after the restora- 
tion of peace and the abolition of the corresponding 
internal revenue taxes ; where the efforts at reduction in 
1872 proved transient, and the acts of 1883 and 1890 only 
emphasized the protective features of the tariff system. 
It has been manifested both in France and Germany with 
increasing force in the years since the war of 1870; nor 
has any large power in Continental Europe been exempt 
from its influence. The English colonies have felt the 
effect of the same movement ; and even in England itself 
under the guise of an agitation for " fair trade," there 
have been a few appeals for the renewal of protective 
duties. 

§ 468. There are three distinct lines of argument for a 
protective tariff. The first, which claims that protection 
makes high wages by keeping money at home and by 
directly creating an increased demand for labor, is popular 
and superficial. The second, which urges the indirect 
economic advantages of diversification of industry, is less 
popular but more substantial ; and the same may be said 
of the third, which looks at protection as a military neces- 
sity forced upon a nation by the rivalry or hostility of its 
neighbors. 

§ 469. The popular argument for protection is a sur- 
vival of the mercantile theory of political economy. This 
theory holds that a nation grows rich by making money, 
— by having a large income and small expenses. The 
exports of a nation correspond to the income of an indi- 
vidual ; the imports of the nation correspond to the ex- 
penses of an individual. The national wealth is therefore 



424 PROTECTIVE LEGISLATION. 

promoted by an increase of exports and a diminution of 
imports. Every excess of exports over imports represents 
an addition to the accumulated capital of the country. 
A tariff laid for the purpose of preventing the import of 
thines which can be made at home is a means of increas- 
ing this capital. Such a tariff, it is urged, is not only 
beneficial to the community as a whole, but especially so 
to the laborers. For money, which was formerly em- 
ployed in buying goods from abroad, will, under the 
operation of a protective tariff, be used to give employ- 
ment to laborers at home. All such avoidance of foreign 
expenditure means, therefore, an increase in the wealth of 
the country and in the income of the laborers. 

Carrying the same principle still further it is urged that 
bounties should be given in those industries where an 
effective tariff would make the price to the consumer too 
high, — for instance, in the case of sugar, — or where it is 
desired to stimulate our production for foreign trade as 
well as for domestic trade. But there is more reluctance 
to give bounties than to impose tariffs, because the tax 
arising from a high tariff is, directly at any rate, a source 
of revenue to the government ; while the payment of a 
large bounty involves an expenditure which can be met 
only by levying taxes whose burden is more obvious 
than that of a tariff and therefore more unpopular.^ 

§ 470. This view of the effects of protection is a very 
superficial one. In the great majority of cases it is im- 
practicable for a nation to " make money " in this way. 
It will pay for its imports by its exports and vice versa. 

1 The subject of bounties (and indeed the whole theory of protection) is 
well treated by C. Gide, " Principles of Political Economy," book ii., ch. vii. 
For bounties to shipping see § 490. 

A bounty brings the burden of supporting the favored industry upon the 
shoulders of the whole body of taxpayers. It is therefore theoretically more 
equitable than a protective tariff which taxes the consumers of certain articles 
only. But all our methods of taxation are so bad in many of their workings 
that this theoretical equity is not very well realized in practice. 



FUTILITY OF ACCUMULATING MONEY. 425 

An attempt to diminish the imports and maintain or in- 
crease the exports for any considerable period of years is 
generally futile. The accumulation of money in one 
country and its withdrawal from another will cause high 
prices to prevail in the former country and low prices in 
the latter. The former country thus becomes a good 
market to sell in and a bad market to buy in. People 
will ship more goods to such a country than they would if 
the high prices did not prevail, and will take fewer goods 
from it. They will withdraw gold from the place where 
prices are high, for use in the place where prices are low. 
The experience of four centuries has demonstrated the 
futility of trying to interfere with this movement of specie. 
Although the exportation of gold has often been pro- 
hibited under the severest penalties, it has nevertheless 
continued. Although statesmen have made every effort 
to modify or prevent the operation of this automatic 
movement, by which prices in different communities seek 
their natural level, the results of their efforts have been 
strikingly small. 

§471. In the few cases where these efforts to accumu- 
late money are in any degree successful, most of the 
expected good proves illusory. Higher nominal wages 
combined with higher prices leave the different classes of 
the community in the same relative position that they 
held before. The real demand for labor is not measured 
by the accumulated supply of money, but by the com- 
modities which the laborer can buy with the money he 
receives. If every dollar in the United States were cut in 
halves and each half were called a dollar, there would be a 
larger nominal supply of money but no real increase in 
wages. When an increase of money is the result of better 
business methods, it is a good thing ; but when we seek 
to reverse this process and obtain better business by put- 
ting more money into circulation, we are simply playing 
with figures. 



426 PROTECTIVE LEGISLATION. 

So far as the increase of money is obtained at a sacrifice 
of useful things which the money would buy, it may prove 
a positive disadvantage to the laborer. If we succeed for 
a few years in arbitrarily checking our imports, we may 
find ourselves with more money and less of certain other 
things which would help our productive laborers more 
than money does. In this respect, the mercantile system 
of political economy may not inaptly be characterized as 
a miserly system. It would make the policy of the nation 
similar to that of a miser rather than that of a wise mer- 
chant. The successful business man is not the one who 
sells the most and spends the least, but the one who 
spends his income on things which will permanently in- 
crease his earning capacity in the future. The successful 
nation is not the one which strives to get the most money, 
but the one which invests most of its income in increased 
productive resources, by purchasing things which other 
nations are able to place at its disposal, that will either 
increase the real wages of the laborer to-day or give better 
chances for efificient exercise of labor in the immediate 
future. 

§ 472. But it may be urged that countries like the 
United States, which have borrowed large amounts of 
capital, may profitably employ an excess of exports over 
imports in paying their debts. A debtor should under- 
take to sell more than he buys, and spend the difference, 
not in extending his personal consumption, not in making 
additional investments, but in cancelling past obligations 
and placing himself in a position of independence. This 
is in a measure true. But the adoption of such a policy 
by an individual indicates that his business has pretty 
nearly reached the limit of its growth. Until this point 
is attained, he will find it more profitable to use his sur- 
plus income in widening the scope of his operations than 
in paying his debts. The conspicuously successful leader 
in commercial enterprise is not occupied with restricting 



THE BALANCE OF TRADE. 427 

his liabilities, but with increasing his assets. As long as 
he can borrow capital at a low rate and use it with large 
profit, he will care less to diminish his obligations than to 
enlarge his means of meeting them. The United States 
is in a position of this kind. While it is a satisfaction to 
pay our debts, it is a greater satisfaction to increase our 
resources. The years which show the greatest excess of 
exports over imports have not always been the years of 
conspicuous industrial prosperity. 

§ 473. The evils resulting from an adverse balance of 
trade, — i. e., an excess of imports over exports — are much 
exaggerated. As was clearly pointed out by Daniel 
Webster, a slight adverse balance represents a normal 
and healthful condition of commerce. If we ship goods 
worth $1,000,000 at New York and sell them for $1,100,000 
in London, we are in a position to bring back goods worth 
$100,000 more than those we shipped. The possibility of 
selling our goods at a profit is the best indication of de- 
mand for the products of our labor. Of course it is con- 
ceivable that we should bring back the $100,000 in specie. 
But a very slight movement of this kind would cause a 
redundance of money in New York and a scarcity in 
London. The difference of price levels thus created 
would make further exports difificult, and would diminish 
instead of increasing the demand for the products of our 
labor. There may be times when, owing to the precari- 
ous condition of its currency, a nation needs specie more 
than goods, and when imports of coin are of more conse- 
quence to it than any other form of capital. But these 
cases are exceptional. The history of the mercantile sys- 
tem (§ 9), enforced as it was by the efforts of the ablest 
European statesmen for two centuries, goes to show the 
fatuity of trying to increase a country's supply of gold 
by statutory restrictions either on the movement of the 
metal or on that of the commodities for which it is ex- 
changed. 



428 PROTECTIVE LEGISLATION. 

A country which mines more gold than it needs for its 
immediate use, purchases other forms of capital with the 
surplus. This creates an apparent adverse balance of 
trade — an import of goods and an export of gold ; — yet 
gold mines are a source of industrial prosperity and 
strength. Even when the United States has an adverse 
balance greater than the product of its mines, it does not 
necessarily mean that we are losing gold ; it may mean 
that foreign countries are using their capital to develop 
our natural advantages and are taking their pay in se- 
curities. We are increasing our indebtedness ; but we are 
yet more rapidly increasing our productive assets and our 
effective employment of labor. 

All payments to foreigners — freights, interest, invest- 
ment, foreign travel — tend to make our balance of trade 
look more favorable, because we are usually compelled to 
export goods to meet them. All receipts from foreigners 
from the same sources tend to make our balance look less 
favorable, because foreigners generally cannot pay them in 
gold without causing redundance and therefore ship 
goods instead. Yet the payments on the whole represent 
sources of weakness, and the receipts are all but universally 
sources of strength. England habitually imports more 
than she exports because other nations owe her so much 
for interest and freight charges ; in other words, because 
she has large invested capital and a large merchant marine. 

§ 474. Unless a country is in some very exceptional 
financial position stoppage of imports means stoppage of 
exports, because other nations cannot continue to buy its 
goods unless they sell it their own goods in return. 
The apparent widening of the home market and in- 
crease of the demand for labor caused by a protective 
tariff is accompanied by a narrowing of the foreign 
market and a diminution in the production of goods for 
export which was profitable under the old system. 
What is called the creation of a new industry is gen- 



DIVERSION OF CAPITAL. 429 

erally nothing but the diversion of capital and labor 
from one industry to another. The exceptions to this 
rule are more apparent than real. We see the opportunity 
for profitable employment of foreign capital and immi- 
gration of foreign labor in a new line ; we fail to see with 
equal clearness the loss of some of the opportunities 
which made foreign investment and foreign immigration 
in old lines most profitable. If the imposition of a high 
tariff is followed by prosperity in manufactures and ad- 
versity in agriculture, everybody credits it with the former 
results, while few look far enough below the surface to 
hold it accountable for the latter. 

§ 475. This diversion of labor and capital is, presumably 
at any rate, from a line where it is more efificient to one 
where it is less so. If there is one line of industry where 
an American can compete with the whole world without 
the aid of a protective tariff, and can sell his goods in 
foreign markets though he pays double the wages given 
by his competitors, it shows that his natural advantages 
are such that his labor is more than twice as efificient as 
theirs. If there is another line where he cannot compete 
with the foreigner because of the difference in American 
wages, it shows that his natural advantages are less than 
this difference. The man who exports goods must pro- 
duce so much more than his foreign competitors that the 
superior efficiency of each individual laborer covers not 
merely the difference in wages, but the cost of transpor- 
tation also ; while the man who is shut out from the home 
market by his foreign competitor is employing labor 
whose efficiency is so much less than the difference in 
wages that the foreign producer can pay the cost of trans- 
portation ^ and continue to undersell him. 

^ The current argument, that protection produces economy by having 
goods consumed near the point of production, is in large measure fallacious, 
for if people import an article from a distance it shows that the difference 
in economy between the producers of an article in two countries more than 
covers its cost of transportation. 



430 PROTECTIVE LEGISLATION. 

§ 4/6. The popular argument, that by admitting goods 
free of duty we subject ourselves to the competition of 
pauper labor, ignores the fact that the chief reason for 
the difference between American and European wages 
lies in the difference of efficiency of American and Euro- 
pean workmen. The American gets higher wages than 
the European competitor, because he does more work in 
a day (§ 362). The cost per unit of product in the United 
States, which is the thing that determines power of com- 
petition, is low in some lines and high in others. In 
general, it is lower than that of Europe in the unprotected 
industries, and higher in those which are protected either 
by a tariff or, as in the case of personal services, by the 
impossibility of transportation. 

If American locomotive works are competing with Eng- 
lish locomotive works in neutral markets, it shows that 
the labor cost per locomotive in the two countries is sub- 
stantially the same ; for if the English labor cost were 
higher, the American locomotive builders would drive 
the Englishmen out of the market ; and conversely, if the 
American labor cost were higher, the English builders 
would drive out their American competitors. Therefore, 
if the wages per day of the American workmen in these 
lines are higher than those of the Englishmen, it follows 
that their efificiency, as measured by amount of work 
done, is also correspondingly higher. If American clock- 
makers compete not only in neutral markets, but in Eng- 
land itself, it shows that we have an advantage in efK- 
ciency which more than makes up for any difference in 
wages. Industries of this kind have nothing to fear from 
pauper labor. What is apparently the dearest labor is 
really the cheapest. This superior efificiency of the 
American workman in these lines is the cause of the 
high wages which he receives. 

There are some forms of labor, like that which is em- 
ployed in the building trades or like personal and profes- 



CAUSES OF HIGH WAGES. 43 1 

sional services, whose results must be utilized on the spot. 
Laborers in these lines will . share in the high wages en- 
joyed by workmen in those industries where we have 
natural advantages, because if the wages in services or 
building trades were low while those in exporting trades 
were high, the workmen would nearly all desert the 
former line of employment and gravitate toward the laL- 
ter. The demand for services at home on the part of the 
men who make goods for export, forces them to offer 
sufficiently high wages to induce men to render those 
services.' This result must ensue whether we have a 
tariff or not. We cannot have our meat cooked in Paris, 
our boots blacked in London, or our houses built in 
Berlin, no matter how cheap these services may be in 
foreign countries. The cook, the boot-black, and the 
house-builder therefore share in the high wages due to 
the efficiency of labor in lines for which we have a natu- 
ral advantage. But there are other forms of industry, 
like the manufacture of woollen cloth, where we have the 
option of having the work done at home or abroad. In 
the production of woollen cloth we have little or no ad- 
vantage over our foreign competitors ; much less than 
our advantage in some other lines of productive industry. 
If we leave trade free, we shall export wheat and cotton, 
metals and certain lines of manufactures for which we are 
particularly skilled, and shall import woollen goods from 
abroad. If we place a tariff on woollen manufactures 
which prevents their importation, we shall divert a part 
of our labor from wheat and cotton and mining and 
specially profitable manufactures to a line of industry 
where we have no especial advantage, and shall thereby 
reduce the average efficiency of our labor. When we are 
threatened with severe evils as a result of admitting the 

^ In a mining camp the cook will receive wages at least as high as the 
average of miner's earnings, because if offered less than this, he will prefer 
to seek for gold on his own account, instead of staying at home to cook. 



432 PROTECTIVE LEGISLATION. 

pauper labor of Europe to compete in our own markets, we 
must remember that the chief effect of such competition 
will be to force our labor into lines where it is more pro- 
ductive. We shall make it impossible for men to live in 
some lines ; we shall make it more profitable to divert 
their work to other lines. 

§ 477. It is sometimes said by protectionists that they 
do not want us to diminish our imports as a whole ; they 
want us to make all the things we can and use our money 
in importing things we cannot get otherxvise. But the 
question of ability or inability to make a thing is one of 
degree. If we try to make things for which we have 
only moderate advantages, and in so doing divert labor 
and capital from those where we have extraordinary ones,, 
we do not, in general, make money ; we lose more than 
we gain. The attempt to do everything ourselves for the 
sake of shutting out the competition of pauper labor from 
abroad is in its results not unlike the attempt of a surgeon 
to make money by shovelling his own snow. The surgeon 
has a physical and mental education which enables him 
to shovel snow with less expenditure of time and force 
than the laborer who offers to do it for him. Why, then, 
does he hire the laborer instead of doing the work him- 
self ? Why does he say that he cannot afford to shovel 
his own snow ? Because there is a line of industry open 
to him in which he can make ten dollars an hour, and he 
cannot afford to waste his strength in competing with 
men who earn one dollar an hour. The diversion of force 
to the unprofitable employment is a loss instead of a gain. 
If an ordinance were passed compelling every surgeon to 
shovel his own snow, he would gain one dollar and lose 
ten. He would avoid the competition of pauper labor, 
but at the expense of a large reduction in his aggregate 
income. His high rate of pay is the result, not of legisla- 
tive restrictions, but of a difference in industrial efificiency ; 
an advantage which he may forego if he chooses, for the 



EXHAUSTION OF THE SOIL. 433 

sake of diversifying his employment, but at an economic 
loss rather than an economic gain. 

§ 478. In the second group of arguments for a protec- 
tive tariff, it is frankly admitted that the so-called creation 
of new industries is really a diversion of labor and capital 
from one employment to another ; but it is maintained 
that the indirect advantages which may accrue from such 
a policy are great enough to warrant any temporary sac- 
rifice which it involves. Its advocates urge, in the first 
place, that the apparent profit in the exercise of unpro- 
tected industries is often not a real or permane^it one. 
An industry may apparently be very profitable, when 
private individuals are being allowed to appropriate the 
natural resources of the country and to weaken it by 
sending those resources abroad for their own pecuniary 
advantage. This is true conspicuously of mining and 
timber cutting ; it is in somewhat less degree true of 
food production. Systems of agriculture under whicii 
the owners seek to get all that they can out of virgin soil, 
exporting a large product for a few years without making 
proper returns to the land in the form of manure, may 
result in impoverishing the home country for the benefit 
of foreign consumers. If by a well devised tariff a part of 
the labor and capital thus used in agriculture is diverted, 
to manufacturing, the advocates of protection say that: 
it will result in supporting more people at home with 
less exhaustion of the soil, and on a basis which, though 
perhaps temporarily less remunerative, will be far more 
profitable in the long run. 

They urge that under these circumstances the tariff 
may conceivably give increased employment to labor 
from the outset. If a country is engaged in agriculture, 
and in that alone, the differences in the character of the 
land used will show themselves in the form of economic 
rent. This is a surplus which goes to the landowners and 
is not necessarily distributed among the laborers at all ; 



434 PRO TECTIVE LEGISLA TION. 

especially if the landowner uses his income to import 
foreign articles of luxury. If a change in tariff policy 
causes less agricultural land to be used and makes indus- 
try more diversified, there will be smaller differences 
which can be appropriated as rent. Even where the 
momentary efficiency of labor in earning a return for 
its employer is slightly diminished, it is quite conceiv- 
able that the amount actually distributed to labor may 
increase, and the social condition of the community be 
benefited rather than injured. 

§ 479. If this is conceivable as a momentary result, it is 
still more possible in the long run. The introduction of a 
new industry is attended with great difificulties, which 
make its returns during the first years quite uncertain. A 
tariff arranged to protect an infant industry may be suf- 
ficient to overcome this initial uncertainty which makes 
it impossible for individuals to start such an enterprise ; 
and may after a brief time provide the country not only 
with profitable investments of capital in diversified lines, 
but with useful employment for laborers whose skill would 
otherwise have remained undeveloped. 

Such investments, it is said, give a chance for the em- 
ployment of high-grade labor, which would otherwise be 
compelled to accept what it could earn in lower grades of 
work where its special powers would be less perfectly 
utilized. If a country like England has special industrial 
advantages in the way of established connections and 
large capital, it may force other nations to engage in less 
complicated forms of labor which do not properly utihze 
their more intelligent members. This argument, which is 
strongly urged by writers like List or Gunton, is the oppo- 
site of the pauper labor argument. In this view, a country 
needs protection, not from the weakest laborers of other 
countries, who would crowd its own citizens up into 
higher lines, but from the strongest laborers of other 
countries, who would crowd them down into lower ones. 



DANGER OF MISTAKES. 435 

§ 480. On the theoretical merits of this argument for 
protection, it is difBcult and unnecessary to pronounce a 
definite judgment. If we could assume that the legisla- 
ture would be wise and incorruptible, we might hope that it 
could frame a tariff which would be of positive benefit to 
the community ; and it is altogether probable that it could 
devise one which would produce more good and less evil 
than any system of national taxation which is now in use. 
Put in actual practice we do not have to deal with 
an all-wise and incorruptible legislature. The chance 
for mistakes in the adjustment of industrial burdens, 
whether made in good faith or otherwise, is extremely 
great. The legislature sees the new industries which are 
developed ; it fails to see the old ones which are handi- 
capped. It may produce unforeseen losses which out- 
weigh the expected gains. Our increase of manufacturing 
in the years succeeding the Civil War is heralded as 
a result of a high tariff, by many who overlook the 
effects of that tariff as manifested in the accompanying 
diminution in the ocean marine and ocean shipbuilding 
industries. 

§ 481. The apparent prosperity which often attends the 
first operation of a protective tariff increases the proba- 
bility of these mistakes. The policy of shutting out foreign 
goods means that the protected country duplicates the 
plant by which they were made. The persons who were 
saving money have, for the time being, a profitable 
method of utilizing their surplus — and, incidentally, of 
damaging the foreigner by so doing. But after a short 
time this special chance for investment ceases. The 
laborers employed in making machinery are thrown out 
of work. The whole industrial world suffers from the 
effects of a policy which has duplicated means of produc- 
tion and restricted facilities of exchange. 

§ 482. Far from preventing exhaustion of the soil, actual 
tariff legislation is apt to stimulate it. We have for many 



436 PROTECTIVE LEGISLATION. 

years had a tariff on copper not justified by any difference 
in its cost of production — for no mines in the world can 
produce so cheaply as those of the Lake Superior region 
— but acting as a bonus on the unnatural extension of 
mining operations. American copper has habitually been 
sold in London in competition with foreign copper, at a 
price less than was paid by American consumers at home. 
We have put a positive premium on the exhaustion of 
American mines for the benefit of the foreign consumer. 
Equally conspicuous is the case of lumber. Without any 
good pretext in connection with the necessity of paying 
hish wap-es to American labor — for the labor that is 
employed in the lumber business is very largely com- 
posed of Canadians who come to this country temporarily 
and return to their homes at the end of a season — we have 
exhausted our northern forests at a rate which has proved 
dangerous, not merely to the resources of the country as 
timber land, but to the rainfall and other conditions con- 
nected with public health. 

§ 483. Under these circumstances, the argument about 
increasing the share of the national income that goes to 
the laborer and diminishing the proportion that goes to 
the landowner has no practical application. A duty like 
that which was imposed on copper shows its results, not in 
the increased proportion of wages paid in the copper 
industry, but in the very high value of the shares of well 
situated copper mines. A tariff which is accurately ad- 
justed to counterbalance any difference in labor cost in 
two countries may have the theoretical effect of increasing 
the laborer's share at the expense of the landowner's ; a 
tariff rate higher than this is likely to have the opposite 
effect. The manufacturers in protected lines of industry 
always protest against public attempts to ascertain their 
labor cost per unit of product. This protest creates a 
presumption that the tariff is higher than can be justified 
on grounds of protection to labor alone. 



DELAY IN REDUCING DUTIES. 437 

§ 4840 Protection to infant industries has unquestion- 
ably proved successful in certain cases. But it is open to 
doubt whether the number of instances of success has 
been sufficient to justify the expense involved. The 
period of industrial infancy, and the taxation connected 
with it, almost always continues longer than was at first 
anticipated. Very few industries have been in a position 
to submit to a removal of a protective tariff within the 
time originally contemplated. In many the rate of pro- 
tection has tended to increase rather than to diminish. If 
a duty is " specific " (§ 507), i. e. based on the quantity of 
a product imported rather than on its value, the cheapen- 
ing of the protected article through new processes of 
manufacture makes the rate of protection constantly in- 
crease. Even where successive tariff bills reduce the 
specific duty per yard or per pound, we do not gener- 
ally find any continuous reduction in the ratio between 
the duty levied and the value of the article at the time 
of passage of the different acts. The steel rail industry 
of the United States is often cited as an instance of suc- 
cessful protection and falling tariff rates ; but the actual 
percentage of duty levied has on the whole increased. 
The tariff rate per ton has fallen ; but the price of rails 
has fallen still faster. Nor has this diminution in price 
been the result, as some persons would have us believe, 
of the development of industry in the United States 
under the tariff itself. The prices have been habitually 
much lower in England than in the United States ; and 
in countries which manufacture no rails of their own they 
have been quite as low as in England. What is claimed 
as an effect of the protective tariff in cheapening prices 
is usually only the natural result of modern improve- 
ments in the arts, which we should have enjoyed quite 
as fully without the tariff as with it.* 

' The only convincing proof that protection has ceased to be a burden 
upon the consumer of any particular article (in other words, that an industry 



438 PROTECTIVE LEGISLATION. 

§ 485. Advocates of protection to infant industries often 
make the mistake of assuming that the foreigner is a single 
person who can shift prices up and down at will ; that 
he will charge high prices for articles which the home 
producers do not make, but accept much lower ones 
when the development of a protected industry has made 
a nation independent of his power. But the competi- 
tion of one foreigner with another prevents extortion- 
ate rates and arbitrary shifting of prices, whether there be 
any home production or not. Foreign trade is the hardest 
field in which to exact monopoly prices, because it is open 
to competition from the whole industrial world. The 
home producer is on the whole far more likely to make 
arbitrary prices than the foreigner, because the difBculty 
of forming a pool which includes all the capital engaged 
in a given line of business in any one country is far less 
than the difificulty of doing the same thing for the whole 
world. This point was illustrated by the history of the 
steel rail traffic, where a strong combination was formed 
that for ten years succeeded in keeping up the price of 
steel rails in those countries which produced them. Dur- 
ing a large part of this period Italy, which produced no 
rails, obtained its supplies from Germany, at rates thirty 
per cent lower than those which were exacted from 
German purchasers. 

§ 486. Any good effect of a tariff in promoting the de- 
velopment of higher grades of productive industry is off- 
set by its bad effect in retarding the development of varied 
consumption. It is a matter of prime importance for the 
community in general, and the laborers in particular, to 
have cheap goods placed within their reach. The educa- 
tional effect of cheapness in increasing consumption and 
diversifying the enjoyments of a community is very great. 
A tariff which temporarily enhances prices for the sake of 

has outgrown the stage of infancy) is furnished by a readiness to have the 
tariff removed. 



POLITICAL DANGERS. 439 

indirect effects on producers is liable to have an adverse 
effect on consumers which outweighs the possible good 
that it might otherwise afford/ 

§ 487. A, tariff to protect infant industry, being avow- 
edly temporary in its nature, is liable to be removed ; and 
the doubt as to the time of this removal constitutes a 
serious economic burden. The great majority of business 
men agree that the worst evil in a tariff is uncertainty ; 
that industry will adjust itself to almost any schedule of 
duties, high or low, if it is continued long enough, but 
that the possibility of a change in the future has a para- 
lyzing effect on trade of every kind. Any tariff which is 
temporary in its nature and variable in its amount is apt 
to produce the spasmodic demand for labor and irregular 
investment of capital in machinery, whose evils have been 
clearly described in a previous chapter. It cannot be 
expected that people will agree as to the time when an 
industry should be left to stand alone. If there has been 
an over-investment of capital in any industry it will suffer 
severely when finally exposed to foreign competition. 
The more completely the height of a tariff has been left 
to the discretion of the manufacturers, the greater is the 
danger of such over-investment, and of organized political 
opposition to the removal of the duty when the pretext 
for it has been outgrown. A system of taxation which 
is arranged with a view to the needs of particular indus- 
tries, rather than those of the treasury department, is 
liable to be upset by a change of party, if the leaders of 
the new legislature are not in touch with the business 
men in industries or localities which have enjoyed protec- 
tion. Here we have what is perhaps the most serious 
evil connected with the protective system. It makes the 
success or failure of business enterprise depend upon the 

' It is strange that Patten, who has so emphasized the importance of 
diversified consumption, should have overlooked this point in his very 
ingenious arguments on the "Economic Basis of Protection." 



440 PROTECTIVE LEGISLATION. 

retention of a particular set of men in office. Whether it 
actually produces corruption or not, it furnishes a power- 
ful motive for subscription to campaign funds, and a 
temptation to corrupt practices. The less the average 
congressman understands the needs of business, the 
greater is the danger that his vote may be shaped by 
the results of improper influences, even when his own 
personal character is above suspicion. With legislatures 
as they are actually constituted and elections as they 
are actually managed, the danger to popular government 
as a whole, arising from this source, outweighs the good 
which can be expected to result from the application of 
protection for the sake of diversifying industry. If the 
business men of the country were unenterprising and 
short-sighted, while its statesmen were able to take a 
wider and clearer view of the future, many of these the- 
oretical arguments for protection would deserve careful 
consideration. With matters as they stand, it seems 
much the safer economic policy to adjust the tariff for 
purposes of revenue. 

§ 488. The third group of arguments for protection is 
based on military necessity. If there were no such thing 
as war, and all countries could settle their disputes ami- 
cably, many protectionists say they would at once be- 
come free traders ; but as long as there is a possibility of 
armed conflict which may exclude a nation from its outside 
sources of supply, they believe it necessary to be prepared 
for such an emergency. They adduce in confirmation of 
their view instances like the American Civil War. The 
North had already established manufactures ; the South 
had to improvise them. This difference had a great effect 
on the issue of the conflict. Of still more importance in 
the same connection was the disparity between the naval 
forces of the North and South. The North had a reserve 
of seamen trained in her merchant marine, and was able 
to establish an effective blockade, which Southern steamers 



NA VIGA TION ACTS. 44 1 

v/ere sometimes able to elude but never really to break. 
As long as the control of sea power exercises such decisive 
influence on the results of warfare, it is claimed that every 
nation which would preserve its independence must main- 
tain not only diversified industries which will make it 
independent of foreign supplies, but an effective navy, a 
merchant marine, and a shipbuilding industry by which 
the navy can be rapidly increased in an emergency. 

So far as this argument is based on political grounds 
rather than industrial ones, it hardly falls within the pur- 
view of an economist to criticise it ; except perhaps by 
the suggestion that a very small part of the proceeds of a 
revenue tariff, placed directly at the disposal of the mili- 
tary authorities, would do more to prepare a nation for 
war than is accomplished by a protective tariff. But the 
policy of protection to the foreign carrying trade is advo- 
cated for its results in the commercial rivalry of nations 
no less than in their trials of military strength ; and no 
economic discussion of the subject is at all complete un- 
less it deals with these claims. 

§ 489. Under the influence of the mercantile system of 
political economy, the leading commercial nations tried to 
protect their shipping by navigation acts, which confined 
the carrying trade between any two powers to the ships 
belonging to those powers. Thus the trade between 
England and France was open to English and French 
ships, but not to Dutch ships. The application of these 
laws caused great inconvenience, involving the ship- 
owners in roundabout voyages, and often preventing 
merchants from forwarding their cargoes as quickly and 
cheaply as they might otherwise have done. Before the 
middle of the present century, these laws were gradually 
done away with ; though the United States still confines 
its coasting trade to its own vessels. 

All direct protection being thus abandoned, the carry- 
ing trade of the world tended to fall into the hands of the 



442 PROTECTIVE LEGISLATION. 

nations that could build and run ships most cheaply. 
For a time, England and the United States were closely- 
matched in the race. As long as ships were built of wood 
the United States had a slight advantage. But with the 
substitution of iron or steel for wood and steam for sail, 
the conditions were reversed ; and a protective policy 
which enhanced the cost of shipbuilding materials tended 
to increase the disadvantage under which American ship- 
owners labored, compelled as they were by law to buy 
their ships at home. They were thus handicapped on 
either side, receiving no protection against foreign com- 
petitors, and being compelled to buy vessels in a dearer 
market in case they wished to run them under the Ameri- 
can flag. As a result the ocean tonnage of America fell 
rapidly behind, in spite of the increased amount of goods 
to be carried ; and England became the unquestioned 
leader in the world's merchant marine. A considerable 
amount of American capital is invested in ships sailing 
under the British flag, because of the economy which is 
obtained in buying ships where they are cheapest. The 
requirement that American ships should be built in home 
yards, which was intended to protect the American ship- 
builders, only resulted in driving the American flag from 
the seas. 

§ 490. When navigation acts were abandoned, recourse 
was had to subsidies as a means of encouraging the mer- 
chant marine. It was inaugurated by Great Britain, 
whose widely scattered colonial empire made it necessary 
to maintain communication between the different ports 
by the quickest possible method, and to utilize steam for 
this purpose at the earliest possible moment. With this 
end in view, large postal contracts were made, during the 
years from 1837 to 1840, with the Peninsular and Orien- 
tal Line, the Cunard Line, and the Royal Mail to the 
West Lidies. The system of profitable mail contracts was 
gradually extended until the time came when the need 



SUBSIDIES TO SHIPPING. 443 

for them was practically outgrown. The United States 
adopted a similar policy a few years later (1848), but prac- 
tically abandoned it just before the Civil War. Since 1880 
there has been a tendency on the part of other nations to 
extend the subsidy system more widely, and to make 
payments, not for special services in carriage of mails, but 
for the much less definite service of running steamers 
under the National flag. France has gone further in this 
matter than any other nation, having an elaborate system 
of bounties both for construction and navigation. Italy 
has adopted somewhat similar methods. Germany, 
Austria and (since 1891) the United States, pay subsidies 
in the form of mail compensation, sometimes under 
general laws and sometimes under special contracts — 
perhaps the most important of the latter being that be- 
tween the United States and the International Navigation 
Company for a transatlantic service. 

These subsidized steamers are useful in providing a 
reserve in case of war. The commercial success of the 
policy is more doubtful, whether we look at its effect on 
the profit of the shipowners or upon the commerce of the 
nation. French experience seems to indicate that the 
system of bounties, by calling unnecessary ships into 
operation, diminishes the regular earnings of the business 
to a degree for which the government bounty furnishes 
scant compensation ; while the old proverb that " trade 
follows the flag " is hardly borne out by recent events. 
It may have been true in old times that goods went 
where ships most desired to take them ; but with modern 
facilities of communication, the owners of the goods make 
up their minds where they want them to go, and the 
ships must take them there or nowhere. All things con- 
sidered, it would be hard to show any commercial gains 
from subsidies which compensate for the sums spent in 
this way. 

§ 491. A popular form of the military argument for 



444 PROTECTIVE LEGISLATION. 

protection rests in the fact that, by the adoption of re- 
strictions upon trade, we do other nations injury. We 
are told that free trade would be all very well if every na- 
tion adopted it ; but as long as other people are imposing 
tariffs against our goods, we must be prepared to strike 
back. Those who hold this view in its milder shape are 
content to regard a tariff as a diplomatic means of secur- 
ing mutual concessions {reciprocity) — sometimes treating 
these concession as steps toward a general policy of tariff 
reduction the world over, which was the plan pursued by 
the ministers of Napoleon III. ; sometimes bargaining for 
them as special privileges not to be granted to the world 
in general, which is the idea underlying the present reci- 
procity treaties of the United States. But there are not 
a few who go farther than this ; who regard injury to 
other nations as gain to ourselves, and who say that they 
advocate a high tariff for the United States because Eng- 
land desires to have a low tariff. 

§ 492. When this view is accepted, a policy of tariff 
warfare follows as a matter of course. There are times 
when it seems as though a great many nations were car- 
ried away with this spirit of commercial hostility. The 
years since 1870 have afforded only too clear an illus- 
tration of this spirit. But they certainly have not been 
a period of prosperity for the nations concerned ; and it 
is perhaps safe to regard the policy of these twenty-five 
years as a set-back in the general current of economic 
events rather than as an indication of the course of that 
current. If we look at any long period of time we find 
that national intercourse and friendliness are increasing 
rather than diminishing. Increased travel and cheap- 
ened transportation bring people together more power- 
fully than armies or custom houses can keep them apart. 
The legal disabilities of foreigners are being broken down 
by international patent right and international copyright. 
The world is on the whole learning that strangers are 



COLON I ZA TION. 445 

not enemies ; and that even in dealings between 
strangers, each party is helped by the prosperity of the 
other. It is undoubtedly true that a nation can hurt 
foreigners by its tariff ; but there is not one whit of evi- 
dence to show that it helps itself individually by legis- 
lation devised with such a purpose, and every reason to 
believe that the attitude of mutual hostility thus engen- 
dered involves evil, commercially and politically, to all 
the parties concerned. 

§ 493. Colonization as a measure of national protection 
and a means of finding profitable employment for labor, 
has had more importance in the past that it has at present. 
The conspicuous advantages which it affords are, first, an 
opportunity of employing labor on new land, and thus 
relieving pressure of population on subsistence ; second, 
a means of diversifying industry by taking advantage 
of different climates and of a range of natural resources 
not likely to be found within the limits of a single com- 
pact territory. The older advocates of colonization laid 
great stress on the second of these points. The English 
authorities measured the value of a colony by its power 
of producing things which England must otherwise im- 
port. Virginia was highly prized because it could furnish 
tobacco ; New England was rated lightly, because its pro- 
ducts were so nearly the same as those of the mother 
country. With the downfall of the mercantile system, 
this argument has been less frequently urged. It is seen 
that the prosperity of a colony and its utility to the 
mother country are due to the general efificiency of its 
labor rather than to the particular form in which that 
labor is embodied. Colonies are now valued by states- 
men as means of relieving the country of its surplus 
population without weakening it to the degree which is 
inevitable when emigrants seek refuge under a foreign 
flag. But even when we look at them in this light, 
colonies are by no means a source of unmixed strength. 



446 PROTECTIVE LEGISLATION. 

As long as they remain weak, they are apt to involve 
expense to the home country ; when they grow strong 
they are independent enough to repel the suggestion that 
they should repay the bounty of earlier days, and to meet 
any attempt to force such repayment by a declaration of 
independence. It is on grounds of political rather than 
of commercial or fiscal advantage that the modern states- 
man must rest his defense of a policy of colonization. 



CHAPTER XIV. 

GOVERNMENT REVENUE. 

Its Different Forms — Principles of Taxation — Certainty the Primary Object 
— Incidence of Taxation — Direct and Indirect Taxes — Property and 
Income Taxes — Progressive Taxation — The Single Tax — Public Debts. 

For American and English readers, the most available general work on 
finance is probably C. F. Bastable's " Public Finance." 2d ed. London, 
1895. The able writings ofWells and of Seligman are unfortunately some- 
what fragmentary. 

The French and German literature on the subject is much fuller. It is 
enough to refer to the writings of De Parieu and of Leroy-Beaulieu, or to 
those of Cohn (translated by Veblen, Chicago, 1895), of Wagner, and of 
the contributors to the second volume of Schoenberg's " Handbuch." 

§ 494. The ordinary sources of revenue of modern 
governments divide themselves into three groups : i. 
Prices. 2. Fees and Assessments. 3. Taxes. 

A price is a charge for special services which people are 
not compelled to accept unless they choose. A fee or 
assessment is a charge for special services which people 
are compelled to accept whether they will or no. A tax 
is not based on special services, but is a forced contribu- 
tion to the general expenses of the government. 

§ 495. When the government revenue takes the form 
of 2l price it is collected by processes like those of private 
business. But the range of prices which the government 
can charge is far wider than that which is open to a pri- 
vate individual or corporation. It may use its position of 
vantage to compel the payment of a higher price than an 
individual can charge, as in the case of the tobacco and 

; 447 



448 GOVERNMENT REVENUE. 

salt monopolies of Continental Europe, or the rates of 
letter postage in the United States. Or, on the other 
hand, it may make use of its varied fiscal resources to 
charge a much lower price than an individual would be 
likely to do or could do without running into bankruptcy. 
This is illustrated by the sales of public land in the United 
States, or by the passenger rates of the various European 
state railroads. Most of the arguments for government 
ownership of industrial enterprises proceed on the assump- 
tion that very low prices will result rather than very high 
ones — an assumption which is not always borne out by 
the facts.' When the government charges more than indi- 
viduals could do, the payment exacted is known as a 
monopoly price, and is treated by most writers on finance 
as a tax on the consumer. When it charges approxi- 
mately the same rate that a private individual would do, 
whether it be under the stress of actual competition or 
not, the payment is known as a quasi-private price. 
When it charges less than a private individual would do, 
the payment is called a public price. 

§ 496. The payment of a price to the government is to 
a certain extent voluntary, since the purchaser has the 
option of avoiding it by going without the service ren- 
dered. When there is no such option, and the payments, 
though based on special services rendered, are collected 
by processes different from those which an individual 
could adopt, it is called an assessment or 2. fee. The chief 
difference between the two things is that an assessment is 
levied once for all, to meet some extraordinary expense, 
while fees are charged for services which are constantly 
recurring in the ordinary course of relations between a gov- 
ernment and its subjects. Assessments are levied on prop- 
erty rather than on persons, and there is usually a more 
careful attempt to make the price conform to benefits 
rendered than can possibly be carried out in the case of 
* Compare § 446. 



TAX A TION. 449 

fees. A sewer is built by assessments ; lighthouse and 
hospital service are supported by fees. It is the theory of 
some writers that fees are based upon cost of service. But 
license fees (which perhaps should be regarded as taxes) 
are far in excess of specific cost of service — indeed there 
is often a conspicuous absence of positive service ren- 
dered ; while judicial fees are in many cases far below 
the cost of maintaining the services which they help to 
support. 

§ 497. Whatever part of the current expenses of gov- 
ernment cannot be covered by prices, fees or assessments 
must in general be met by taxation} 

Taxation is a system of forced contribution to meet the 
general expenses of the government, whether national 
or local. Taxes are distinguished from fees and assess- 
ments in being a contribution for general services instead 
of a more or less adequate return for special services. 
They are distinguished from fines and confiscations in 
being part of a regular system, publicly arranged as a 
means of meeting the deficit which the government ac- 
count or budget would otherwise show. 

§ 498. This idea of systematic taxation has been a 
matter of gradual development. In the earlier stages of 
political society the government tried to get as much as 

* Seligman, in his extremely interesting treatment of the subject, prefers 
a classification of the public revenues based, not on the methods of collec- 
tion, but on the comparative importance of the public and private purpose 
in the service rendered by the government. A quasi-private price is charged 
when the public purpose is of subordinate importance, and the special bene- 
fit to the individual is the dominant consideration. A fee or a tax is 
levied when the public purpose becomes the controlling or exclusive 
consideration of the government in rendering the service while the benefit 
to the individual assumes correspondingly less importance. But it will 
be found on examination that Seligman's classification nearly coincides 
with the one in the text. For if a charge is fixed on a basis of special 
benefits rendered, it is safe to leave it to individuals to decide whether they 
care enough for the service to pay for it ; while if the public purpose be- 
comes the dominant or exclusive consideration, the basis and method of 
collection must be correspondingly modified. 



450 ■ GOVERNMENT REVENUE. 

it could, without regard to system, while the subjects 
were trying to pay as little as they could. As late as the 
seventeenth century the great French financier, Colbert, 
defined taxation as " the art of so plucking the goose as 
to secure the largest amount of feathers with the least 
amount of squealing." It is an unfortunate truth that we 
have not wholly outgrown the stage of political life which 
gave this definition its force. But as popular government 
has made progress, — or, more accurately, as we have 
gradually come to rely on the consent of the people to 
give force to legal enactments — we have learned to regard 
taxes as a self-levied contribution which each man pays 
according to his ability. Though this ideal is as yet very 
far from being realized in practice, it has become a funda- 
mental doctrine of political justice among the great mass 
of civilized men. In fact, the positiveness with which 
this ideal is asserted, coupled with some uncertainty as to 
the form in which it would best be realized, and with 
widespread ignorance as to the means by which it can be 
best attained, forms at present an obstacle rather than an 
aid to measures which would really make taxation more 
equitable. 

§ 499. Adam Smith, in a passage frequently quoted,' 
lays down four criteria of a good tax system : equity, 
certainty, convenience of time of payment, and avoidance 
of unnecessary cost of collection, direct or indirect. If all 
these things can be combined, the tax is obviously a good 
one. But what if they .cannot all be combined ? What 
if the first two requirements (which are the most funda- 
mental general principles, the third and fourth being 
largely matters of administrative detail) be found to con- 
flict with one another ? What shall we do if the pursuit 
of equity demands sacrifice of certainty, and if all the 
methods of taxation which promise a sure return seem to 
leave some men untouched who can best afford to pay? 

1 Wealth of Nations, Book V., chapter ii., part ii. 



ADAM SMITH'S PRINCIPLES. 45 I 

By placing equity first, Smith gives countenance to the 
popular view that we should make this not only our ideal 
of taxation but our guiding principle in framing tax laws. 
As an ideal it is undoubtedly right ; as a guiding princi- 
ple, it will be found to defeat the realization of that ideal. 

§ 500. It should be said in justification of Smith, that 
the distinction between ideals and guiding principles in 
taxation, which has since become so conspicuous, was in 
his day only just beginning to take shape. In ancient 
times certainty and equity went hand in hand. The men 
who held property and enjoyed income had this prop- 
erty and income in forms which rendered it easy of as- 
sessment. Their wealth consisted chiefly of real estate. 
Personal property was small in amount, and consisted 
largely of visible and tangible objects like plate or jewels, 
kept for display rather than for income. The persons 
who could best pay taxes held the property whose value 
could be ascertained. The attempts to levy taxes on 
other people, though frequently made, were at once in- 
effective and unjust. But from the time of Adam Smith 
downward there has been an increasing divergence from 
this state of things. The persons who are best able to 
pay taxes are not now so situated that the assessors can 
ascertain the exact measure of their ability. Invisible 
forms of personal property, like stocks or notes, have 
assumed a dominant importance. The attempt to secure 
equal contributions by a general income tax, or a general 
property tax, may result in exempting the dishonest and 
burdening the honest, in making a tax system whose bur- 
dens are wholly out of proportion to the financial results. 
Under these conditions the tax legislator now has to 
choose between making equality or certainty his primary 
end, rather than to keep both in view as coordinate aims. 

In the light of experience in modern industrial com- 
munities there can scarcely be any doubt as to the 
proper choice. Certainty is the fundamentally important 



452 GOVERNMENT REVENUE. 

object, without which all attempts at equality prove illu- 
sory.' With an uncertain tax no systematic improvement 
can be hoped for. With a certain tax many evils which 
exist at the outset tend to diminish as time goes on. 

§ 501. Uncertainty may result either from failure to 
discover the objects which should be taxed ; or from 
doubt as to their value ; or from the possibility of col- 
lusion between the assessor and the person who should 
pay the tax by which consent is given to an unduly low 
valuation, 

§ 502. To avoid the first evil, taxes should be levied, 
as far as possible, upon visible and tangible objects. In 
general, things should be assessed, rather than persons. 
The attempt to rely on personal disclosure as a means of 
discovering taxable property results in discrimination of 
the worst character. The property or income of widows 
and orphans, which is in the hands of trustees whose 
reports are matters of public knowledge, is taxed at its 
full value ; so is that of a few exceptionally conscientious 
men. The majority of men make some return of taxable 
property, sufficient to satisfy their consciences ; but they 
interpret all doubtful points in their own favor, so as to 
make as few returns as possible. They take the law into 
their own hands ; and, as an English essayist has said, the 
law is such a fragile thing that when men take it into 

' If people would carry out to its logical conclusion the modern theory 
that taxes are a self-imposed burden, we might make equity our primary ob- 
ject as well as our ultimate goal. Where public sentiment insists that peo- 
ple shall make correct tax returns, and treats laxity in this respect as a 
dereliction of public duty, the tax legislator has a comparatively free hand. 
There are certain communities where this sentiment is so strong that the 
principal of self assessment can be safely adopted, with the knowledge that 
crooked tax returns will be as severely condemned by the individual con- 
science as crooked voting. But with the increasing margin of doubt as to 
what constitutes taxable income the difficulty of relying on such sentiment 
becomes greater ; and in the absence of such a controlling motive no tax 
law can be made effective, unless framed with the immediate purpose of 
preventing evasion. 



MEANS OF ENSURING CERTAINTY. 453 

their own hands it is sure to get broken. Finally, there 
is a considerable class of men who have no conscience at 
all in the matter, and who, in safe reliance on the cer- 
tainty that their property will remain undiscovered, escape 
taxation on everything which the law hopes to discover 
by their declarations. 

We cannot rely on the courts for much help in cor- 
recting this injustice. They feel obliged to assume that 
any law will be obeyed, even when it is notorious that 
such is not the case. They can only consider theoretical 
violations of equity ; they leave to the legislator the 
avoidance of practical ones. 

Nor is this an evil that tends to correct itself by time. 
The success of. the bad men in escaping taxation and the 
impunity with which they defy the law, lowers the public 
conscience year by year. When we have a tax law which 
discriminates against honesty, the honesty and the law 
both suffer in about equal measure. 

§ 503. Of the visible and tangible sources of taxation, 
real estate is probably the most important. It can always 
be seen ; it can never run away. In order to be sure of 
taxing its owners, it is only necessary to apply the rule 
of making no deductions on account of debt. Mortgaged 
real estate should be assessed at its full value. This may 
seem to bear hard on the debtor ; but it is really far more 
equitable than the system of deductions. If such deduc- 
tions are allowed, a large part of the money loaned on real 
estate escapes taxation altogether ; while undue burdens 
are put, first, on the holder of unmortgaged real estate 
who has to pay a higher tax rate on account of the deduc- 
tions made from the grand list, and, second, on the honest 
minority of lenders' who pay a high tax- rate on their in- 
vestments, while most other investors make no adequate 
return of property thus loaned. The holder of mortgaged 
real estate gets comparatively little benefit from the de- 

^ Chiefly those whose property is held in trust. 



454 GOVERNMENT REVENUE. 

duction, because the theory that such loans are taxable 
against the lender drives enough honest investors out of 
the mortgage loan market to keep the rate of interest 
higher than it otherwise would be. The only real bene- 
ficiary is the unscrupulous investor who profits by the 
high interest rate and makes no tax return. 

The chief obstacle to a change in system — apart from 
the reluctance of legislators to abandon the old principle 
of taxing persons instead of things — is found in the appar- 
ent loss to communities of lenders, in allowing property 
which their citizens own to be taxed in the place where it 
is invested. But the actual amount collected in this way 
is very small in proportion to the vexation involved. 

Another objection urged against this plan is that real 
estate, which is already overburdened, will suffer still 
more, while personal property will be correspondingly 
relieved. But the secondary result of relieving the lender 
from taxation, owing to increased competition among 
different lenders, will be a lowering of the rate of interest ; 
and the holders of personal property will thus indirectly 
pay a larger share of the taxes than they now do. If 
such loans can be reached by this indirect method, one of 
the largest items of personal property will be taxed ; and 
a very large part of the remainder can be reached by taxes 
on corporations. 

§ 504. In the assessment of corporate property, as in 
that of real estate, no deduction should be allowed for in- 
debtedness. If the attempt is made to tax the debt in 
the hands of the holders, it will fail. The tax should 
reach the whole property of the corporation without 
reference to the question of its ownership. In that way, 
and in that way only, will it be evenly distributed. If the 
market price of the securities is used as a means of ascer- 
taining the value of such property, bonds as well as stock 
should be included in the estimate. It affords opportuni- 
ties for evasion no less than for injustice if two railroads, 



STOPPAGE AT SOURCE. 455 

physically alike, pay different rates of taxes because the 
capital of the one was largely borrowed while that of the 
other was subscribed. 

§ 505. The attempt to levy taxes on the thing where 
the value originates, rather than on the person who re- 
ceives the benefit of such value, is known as the policy of 
stoppage at source. It is the most effective means which 
has been devised for combining economy in collection 
with efficiency in reaching those who ought to pay the 
tax, honest and dishonest alike. Its effects are perhaps 
even more clearly illustrated in income taxes than in 
property taxes. It makes comparatively little difference 
to an honest man whether he receives his full income and 
deducts the amount necessary to pay the tax, or whether 
he receives his income less the deductions and then pays 
nothing. But to the dishonest man it makes a great 
.difference ; for in the former case he has a large chance 
of avoiding payment, while in the latter case, his burdens 
are forcibly made equal to those of the honest man — a 
thing which results in benefit both to the exchequer and 
to the public. The gain in certainty of collection from 
stoppage at source is due to three causes. First, the man 
who makes the payment has no personal interest in giving 
the government less than its due. Second, the fact that 
income is earned is usually much more observable at its 
source, where the transactions that give rise to it are 
matters of public observation, than at the point of its re- 
ceipt, where its existence can only be surmised. Third, 
so many of the payments of income are made by large 
corporations to a number of shareholders or creditors, 
that stoppage at source substitutes a single financial 
transaction, easily and economically controlled, for a 
whole series of individual transactions involved in col- 
lecting the tax from the recipients, whose very number 
tends to multiply both the uncertainty and the expense 
of collection. 



450 GOVERNMENT REVENUE. 

Of course the adoption of this principle interferes with 
the possibiHty of laying progressive income taxes whereby 
the rich pay a larger percentage than the poor ; but if, as 
generally happens, the effort to make the rich pay more 
than their share by a complicated tax system, actually re- 
sults in letting them pay less than their share, we need 
not take great account of this objection, in the present 
stage of industrial society. 

§ 506. The second source of uncertainty arises from 
doubt as to the actual value of the property or transac- 
tions assessed. 

It is always very dif^cult to determine the actual net 
earnings of a business. The gross earnings are compara- 
tively easy to ascertain. The difificulty is to determine 
what deductions should be made from them before we 
reach what is available as net income. Take the case of a 
railroad. It should obviously deduct the expenses of run- 
ning trains, maintaining stations, equipment, and track, 
and paying the salaries of its officers. But what consti- 
tutes maintenance of track or equipment? Shall the 
company simply aim to make ordinary repairs ? This will 
cause the road to deteriorate from year to year as new 
inventions arise, so that the income will really not be so 
large as it appears. Or shall it try to pay for all improve- 
ments out of earnings? This is going to the other ex- 
treme, and will make it appear that a very prosperous road 
has no net income at all. The conception of net income, 
simple as it appears, is really very difificult to apply in 
practice, and involves so much possible litigation that 
many states prefer to substitute a low tax on the gross 
earnings of corporations for a somewhat higher tax on 
their net earnings. The latter would be the more equi- 
table ; for a tax on gross earnings bears hard on a corpora- 
tion which is doing large business at low rates and a small 
margin of profit. But the superior certainty of the tax 
on gross earnings outweighs its theoretical disadvantages. 



DOUBLE TAXATION. 45/ 

In like manner there is a tendency among those charged 
with customs administration to prefer specific duties, 
based on the weight or measure of goods imported, to 
ad valorem duties, calhng for a percentage of their value. 
Although the specific duty is the less equitable in theory, 
and has the added disadvantage of becoming more and 
more protective as time goes on (§484), the multiplication 
of chances of fraud under the ad valorem system is apt 
to turn the balance in favor of specific duties, 

§ 507. The third source of uncertainty arises from 
danger of collusion between the assessors and those who 
pay the taxes. This comes about chiefly where minor 
civil divisions are asked to contribute to the general 
government on the basis of their assessed valuation. For 
local purposes it makes no difference to a town whether 
its citizens pay a tax of one per cent, on a valuation of 
$2,000,000, or two per cent, on a valuation of $1,000,000. 
But if they are asked to contribute to the general govern- 
ment, the community with the low valuation will have an 
advantage ; and the desire to secure such advantages will 
lead the local authorities to a system of undervaluation 
which may easily result in great irregularities. No board 
of equalization can correct such an evil. For certainty 
of valuation it is indispensable that the objects of national 
and local taxation should be kept as far as possible separ- 
ate, from one another. 

§ 508. It is scarcely necessary to add that double taxa- 
tion should be avoided, in the interest of certainty no 
less than of economy and of equity. In the United 
States the sentiment against double taxation is so strong 
that each tax is made a pretext for evading the other. 
In Europe, the objection to double taxation is not so 
strongly felt and the evasion which results from its appli- 
cation is probably less ; but in any event it can hardly be 
other than a wasteful method. 

§ 509. A tax which meets the requirements of certainty 



458 GOVERNMENT REVENUE. 

tends to become more equitable as time goes on. It may- 
impose an unnecessary aggregate burden on the commu- 
nity, which will continue from year to year ; but the ine- 
quality of the burden will tend to reduce itself. For 
capital will not be invested in lines or in places where the 
rate of profit is much lower than the average ; and any 
tax which lowers the rate of profit tends to diminish the 
supply of products and thus to increase the price, putting 
the burden largely upon the consumers instead of the 
producers. 

Let us a take a concrete illustration. Assume that 
railroads were taxed at a higher rate than any other kind 
of property. At first this would be an injustice to the 
owners of railroads ; but as time went on fewer roads 
would be built and the managers of those already existing 
would charge higher prices on account of the demand for 
transportation which they alone were able to meet. Part 
of the burden of the tax would thus be placed on the 
consumers. Meantime the lessened demand for railroad 
labor would tend to reduce either the number or the 
wages of railroad employees ; and the reduction in the 
demand for coal and for iron consequent upon the di- 
minished extent of railroad construction would transfer 
part of the burden to those industries also. As this 
shifting process extended itself year after year it would 
include a wider circle of industries within its scope, and 
it would not cease until the profits of railroad enterprise 
which were at first reduced by the tax, finally adjusted 
themselves to the same general level which prevailed in 
other industries. 

If the tax is not thus shifted by a change in the supply 
of products, it shows that the capitalists were obtaining a 
monopoly profit before the imposition of the tax ; and that 
the apparent inequality due to the failure to shift such a 
tax really puts the burdens where they belong — among 
those who have a distinct surplus under the processes of 
exchange or distribution. 



DIRECT AND INDIRECT TAXES. 459 

§ 510. If all taxes were continuous in their operation, we 
might trust to this shifting process to make them equitable. 
We might fairly assume that in the long run the men who 
were able to pay the taxes would pay them, while those 
who were unable to pay would be crowded out of an indus- 
try. We could judge of the goodness or badness of a tax 
by comparing the benefits derived from its proceeds with 
the evils resulting from this crowding-out process. We 
could set ourselves to work to devise a tax system which 
should raise the necessary revenue with a minimum of 
industrial pressure. But the matter is not thus simple. 
Taxes are not continuous in their operation. New 
grounds of expenditure arise which necessitate either an 
imposition of new taxes or an increase of old ones. 
Changes in industrial method may intensify this need by 
rendering the old taxes less productive ; or they may 
operate in the reverse direction and produce a surplus 
which gives ground for a well-founded claim for reduction 
in tax rates. But whenever any tax is increased or reduced 
a change of economic burdens is created, which it takes 
time to adjust, and which may for months or years impose 
upon certain individuals an undue share of contributions 
to the public revenue, before the matter finally adjusts 
itself in an equitable fashion. 

§511. It is in this connection that the distinction 
between direct and indirect taxes becomes one of domi- 
nant importance. 

A direct tax, as ordinarily defined, is one which is 
levied upon the person who is expected to pay it ; an in- 
direct tax is one whose burden is presumably shifted upon 
some one else. An income tax is generally of the former 
class. The man against whom it is charged is expected 
to pay it at his own loss. A customs duty belongs to the 
latter class. The importer pays it to the government ; 
but it is expected that he will charge the greater part if 
not the whole of it to the man who buys the article, so 



460 GOVERNMENT REVENUE. 

that the tax will ultimately be paid by the consumer 
instead of the importer. 

There is no doubt that there is a real distinction 
between these two kinds of taxes ; but there is a great 
deal of doubt whether the distinction just drawn (which is 
that of Smith and of Mill) correctly marks the line between 
them. Some taxes which are undoubtedly direct are 
shifted at once by legal authority ; for instance when 
a tax on rents is, as a matter of administrative conven- 
ience, collected from the man who pays the rent with the 
understanding that he will deduct it from what he after- 
ward hands over to the owner under previous contracts. 
Again, nearly all taxes on income or on property are, as 
we have seen, gradually shifted, even though the law 
makes no provision for such a process ; and a sharp appli- 
cation of Smith's definition would give the term " direct 
tax " a meaning very much narrower than that which it 
has in current usage. 

In view of this difficulty, Continental writers have gen- 
erally preferred to define direct taxes as those which are 
assessed on persons (or property) and indirect taxes as 
those which are levied on acts. This is correct enough 
in its practical apphcations. But it fails to indicate any 
real distinction of principle ; and therefore, in a consider- 
able number of cases which can be regarded in either light 
{e.g. taxes on occupations) we cannot use the definition 
as a criterion. We decide on unformulated grounds to 
which class a tax belongs and interpret our definition 
accordingly. 

§ 512. Inorder to find the real ground for the distinction, 
we must consider the different ways in which taxes are 
shifted. 

I. In some cases the transfer is a perfectly simple one. 
The person who pays the tax to the government deducts 
the amount of that tax from payments which he would 
otherwise have been compelled to pay to some one else. 



INCIDENCE OF TAXATION. 46 1 

A corporation pays a tax, and correspondingly reduces the 
amount which would otherwise have gone to the security- 
holders. A man who occupies a house maybe compelled 
to pay a tax on its rental with the understanding that he 
is to deduct this tax from the payment which he makes to 
the owners. 

2. Some taxes are transferred by commercial compe- 
tition. A customs or excise duty is largely paid by the 
consumers, not voluntarily, but because the dealers find it 
impossible to furnish the goods at the price which pre- 
vailed before the imposition of the duty ; and this reduc- 
tion in current supplies produces competition among 
buyers, until the price rises high enough to compensate 
the importers for their expense under the new conditions 
of trade. 

3. Some taxes are transferred only by industrial com- 
petition (§ 100), instead of commercial ; not by the com- 
petition of buyers for a supply of products which the tax 
suddenly reduces, but by the withdrawal of capital in- 
vested in certain lines where the tax has borne heavily, 
and a slow indirect readjustment of the relations of sup- 
ply and demand. It is not always possible to distinguish 
sharply from one another the effects of commercial and 
industrial competition ; but there is a clear general line 
of distinction between the quick adjustment under the 
one process and the slow adjustments under the other. 

§ 513. With the third of these means of shifting taxes, 
the distinction between direct and indirect taxation has 
nothing to do. The terms direct and indirect apply to 
immediate incidence, not to ultimate incidence. A tax 
is said to be direct when its immediate burden is shifted 
only by the first of these processes, and therefore falls 
within the prevision of the legislator. It is said to be 
indirect when its immediate burden is shifted by the sec- 
ond of these processes, and cannot be at all accurately 
foreseen by the legislator. To the former class belong 



462 GOVERNMENT REVENUE. 

property, income, and inheritance taxes, no matter from 
whom they may be first collected ; also poll taxes, and 
franchise taxes in their various forms. The latter class is 
exemplified by excise and customs duties. 

§ 514. Indirect taxes are not generally available for 
local purposes. If a locality attempts to tax a certain 
class of acts while neighboring localities do not, it is apt 
to result in driving business from the place where it is 
taxed to that where it is untaxed ; disturbing trade while 
the process of adjustment is going on, and leaving com- 
paratively little revenue after it is completed. There are 
exceptions to this rule ; for instance the octroi, or tax on 
provisions entering the close walled towns of continental 
Europe. But the general tendency as time goes on is to 
leave the collection of indirect taxes more and more to 
the central authorities. The local governments are thus 
compelled to rely on direct taxation as the chief source 
of their revenue. 

The central government can use either form of taxation, 
it pleases. It will generally collect a large part of its 
income by indirect taxes, using direct taxation to make 
up any temporary or fluctuating deficit. It is in some 
respects desirable to restrict direct national taxation to a 
minimum ; for if the proceeds of a direct tax on the prop- 
erty or income of one locality are used for purposes in 
which other localities are exclusively interested, there is a 
feeling of injustice which cannot come up in the same 
form Avhen each section uses its own taxes for its own 
purposes. There are, however, certain forms of direct 
taxation which cannot advantageously be levied by mu- 
nicipal assessment. This is notably the case with taxes 
on large corporations. The value of a railroad is by no 
means the sum of the values of the separate pieces of 
property in the different towns through which it runs. 
It is much greater than this ; and it can only be properly 
determined by being assessed as a unit. The taxation of 



INCOME AND PROPERTY TAXES. 463 

corporations in America has mostly been in the hands of 
the States ; but with the rapid growth of industrial con- 
solidation, interstate tax problems are beginning to have 
increasing importance. Even though the revenues from 
this source continue to be used for State purposes, it 
seems inevitable that their assessment and apportionment 
should be under national control if we are to avoid the 
double taxation and other evils which prevail in the 
present system. 

§ 515. Most direct taxation is necessarily based upon 
wealth, because the possession of wealth is the chief cri- 
terion of a person's ability to bear an additional tax. 
But whether such ability is best judged by measuring 
wealth as capital, and imposing a property tax, or by 
measuring it as income, and taxing it accordingly, is a 
question on which there is no unanimity. The bulk of 
European judgment and practice favors the latter method ; 
in America the former is in more general use. 

The theoretical arguments as to the merits of the two 
methods are rather inconclusive. At first sight, income 
seems a fairer measure of ability than accumulations ; for 
the receipt of income represents present productive 
capacity, while the possession of savings does not. But 
it must be remembered that a man who has a current 
income of $10,000 and no savings is practically compelled 
to lay aside a considerable proportion of it for the future; 
and a system which taxes him at the same rate as the 
man who has the same income from invested capital 
creates gross inequality of burden. So conspicuous is 
this fact that many of those who believe in taxing income 
rather than property, would levy a lower rate upon per- 
sonal earnings than upon income from investments. 

There is an argument often urged in favor of an income 
tax which, when carefully examined, appears unsound. 
It is said to be essential for the community that taxes 
should be paid out of current income rather than past 



464 GOVERNMENT REVENUE, 

accumulations ; that a tax on property as distinct from 
income is really a tax on accumulations and a discourage- 
ment to saving. This argument depends for its force 
on the assumption that a tax on income will be paid out 
of income and a tax on property paid out of capital ; an 
assumption for which there seems to be no warrant. For 
capital and income are not separate things ; they are 
different ways of measuring the same thing. Capital is 
constantly being converted into income, and income into 
capital. A tax is really paid out of capital when its 
effect is to make the amount of accumulations at the 
end of the year less than they otherwise would be ; it is 
paid out of income, when the expenditures of the year 
are reduced to meet the tax, so that the am.ount of 
accumulation remains unimpaired.^ If an income tax 
bears heavily on the men who would otherwise make 
savings, it is paid out of the nation's capital ; if a property 
tax causes the property owner to reduce his current ex- 
penses, it is paid Out of income. There seems to be no 
direct relation between the form in which taxes are 
assessed and the choice of means adopted to pay them. 

§ 5 16. Apart from the possibility of progressive or com- 
pensatory taxation, (§§ 517, 518) the theoretical advan- 
tages and disadvantages of income and property taxes 
are so closely balanced that the question between them 
must be decided on the basis of certainty of assessment 
and ease of collection. In the former respect the property 
tax has perhaps a slight advantage. The measurement of 
capital presents fewer theoretical difificulties than the 
measurement of income ; for we have to make a number 
of uncertain deductions in the latter case which are not 
involved in the former. But practically our choice depends 
on the preferences and habits of the people. If they are 
accustomed to an income tax rather than a property tax 

' The desirableness of this condition is by no means so self-evident as some 
people suppose. Compare § 161. 



PROGRESSIVE TAXATION. 465 

we may expect better results to be reached on taxing in- 
come. If they are more accustomed to the property tax 
the case will be reversed. The experience of the United 
States immediately after the war, contrasted with that 
of most European states, shows how great may be the 
difference in productiveness, in equity, and in popularity, 
of similar taxes in different communities.' 

§ 517. It is a more important question whether we 
should strive to have equality or progression in our direct 
taxes ; whether we should tax each source of wealth in 
proportion to its value or whether we should try to tax 
the strong man at a relatively higher rate than the weak 
man. The latter policy is urged on two grounds ; first,, 
because in all the early stages of their operation indirect 
taxes, by raising the price of articles of consumption,, 
affect the poor, who spend their incomes, relatively more 
than the rich, who have a large surplus which they do not 
spend ; second and more important, because any increase 
of direct taxes which may be needed to meet a current 
emergency hurts the poor man, far more than it hurts the 
rich man. If a man makes only enough to keep himself 
and his family alive, the imposition of a tax will cause 
some of them to starve. The process of adjustment by 
which wages are raised to meet such a tax will only be 
brought about after most acute suffering and irreparable 
loss. 

' The notorious evils in the working of the general property tax in the 
United States have created some prejudice against this mode of assessment.. 
But the inequalities of this tax are less than those which the country suffered 
under the income tax ; and both are more conspicuously the result of want 
of certainty than of want of equity. The evils were not due to the fact that 
property was a bad basis of assessment, but to the fact that much property 
which was nominally subject to assessment was not reached at all. If local 
expenses were met by taxes on local real estate only, no deduction being 
made for debts, and if state expenses were largely met by corporation taxes, 
which the exemption of personal property from local assessment would make 
possible and equitable, we should be likely to have a tax system which would 
be efficient, elastic, and reasonably just. 



466 GOVERNMENT REVENUE. 

These objections do not apply so directly to a tax 
on property as to a tax on income. Even a small property 
gives its owner a certain leeway when a new tax is im- 
posed, and prevents him from starving as long as his 
accumulations hold out. It may be a misfortune and an 
injustice to deprive him of part of his savings; but it is 
not, in most instances, a direct deprivation of all im- 
mediate means of support. A property tax can therefore 
be madC' general without immediate disaster ; while an 
income tax practically involves the exemption of a mini- 
mum ^ income necessary for the support of a family. 

§ 518. Any such exemption causes the large incomes 
to be taxed at a higher rate than the smaller ones. Thus 
if $1000 is exempt from taxation, and the excess above 
that sum is taxed five per cent. 

An income of $1000 pays $0 or o per cent 



1500 


25 


if 


2000 


50 


2i 


2500 


75 


3 


3000 


100 


3i 



and so on with constantly increasing percentages. But 
when we come to deal with really large incomes the 
changes of rate due to this cause are very slight in 
amount. Thus, an income of $50,000 in the case sup- 
posed will pay at the rate of A^-^-^ per cent ; while an 
income of double the amount will pay at the rate of 
A\% ps^ cent. The difference between the two rates is 
hardly noticeable in comparison with the difference in 
wealth of the two individuals. Under these circum- 
stances, all the more radical champions of progressive 
taxation insist on an increasing rate as well as on the 
exemption of a fixed minimum. The increasing rate is 
used in several countries of continental Europe, and is 
perhaps most conspicuously exemplified in Switzerland. 

* It depends upon the judgment of the legislature how high this minimum 
shall be fixed. There is no well-recognized standard in fiscal usage. 



TAXATION OF MONOPOLIES. 467 

There can be no reasonable doubt that a progressive tax, 
if collected, imposes the immediate burdens where they can 
be borne with least hardship. But it seems equally cer- 
tain that such a system increases the difficulty of collec- 
tion. It makes it necessary to assess the tax against the 
actual recipient of the income in such a way as to make 
the principal of stoppage at source quite inapplicable. 
In so far as the uncertainty from this cause makes itself 
felt, the attempt to secure progression does a permanent 
harm which outweighs any temporary good. For it 
must be constantly kept in mind that the need for 
equalization of burdens which progression aims to meet 
is a transient one, which will in any event be gradually 
met by the process of industrial competition ; while the 
equalization that depends upon certainty is a permanent 
matter, which will not adjust itself under any law, how- 
ever well meant, that fails to secure such certainty. 

§ 519. An effort is often made to combine certainty of 
collection Avith equality of immediate burden by exempt- 
ing competitive gains and taxing monopolized advantages 
— especially those of landed property. Some have gone 
so far as to believe that a single tax, on this basis alone, 
would afford the government its necessary revenue with 
a minimum of hardship, and perhaps with a positive inci- 
dental gain. 

If we make use of the method employed in § 295 (Fig. 
9) we shall see that a tax which is made proportionate 
to the Income from a given business usually puts severe 
burdens on consumers and on laborers.' If, to the ex- 
pense of production qy -\- yx (wages -{- interest,) there be 
added a tax xt (Fig. 1 1), the quantity sold must gradually 
fall until a new point of equilibrium between demand 

' The effect here described is most immediate if the tax is placed on the 
consumer (indirect taxation). It is much slower in the taxation of labor, 
and probably slower still in the taxation of capital ; but the final adjustment 
tends to be the same in all cases. 



468 



GOVERNMENT REVENUE. 



and supply is established. At this point the price Op' 
will cover wages -|- interest -{- taxes (^'j' -I-/'-^'"!"-^'^') • 



Fitj.n 




The amount of government revenue will be represented 
by the rectangle rx't'p' . The losses incident to the col- 
lection of this revenue will be as follows : 

1. The consumers have to go without a certain amount 
of goods q'q. 

2. A rise in price reduces the consumers' surplus from 
the series of transactions from pxb (Fig. 9) to p't'b (Fig. 
II). 

3. The labor which produced the goods q'q is thrown 
out of employment. 

4. A fall in wages reduces the producers' surplus from 
ayw (Fig. 9) to ay'w' (Fig. 11). 

5. The field of investment of capital is reduced by the 
amount of reduction of wages. 

§520. According to the advocates of the single tax 
theory, most of this burden is an unnecessary imposition 
on society, due to the taxation of competitive gains on the 
same basis as monopolized gains. 

We have seen (§ 319) that in many lines the expense of 
production of the same article varies widely for different 
competitors. Some of those who are engaged in its pro- 
duction obtain a differential gain. If we can tax this gain 
and not tax the men who fail to secure it, we shall avoid 



TAXES ON DIFFERENTIAL GAINS. 



469 



most of the evils described in the preceding section. The 
quantity of goods produced will not be altered ; for the 
tax will only affect those men who produce the goods at 
a special advantage, and these will prefer to pay the tax 
rather than abandon an exceptionally profitable business. 
Therefore all the laborers will be employed at the old 
wages, and all the consumers served at the old prices ; the 
revenue of the government will be furnished by those 
who can afford to pay taxes and who will not be led to 
change their occupation by so doing. 

This state of things may be roughly represented as fol- 
lows (Fig. 12). With a demand curve bb' and a price Op 




at which the supply equals the demand we shall find that 
payments to laborers for producing different parts of the 
supply vary from a maximum qy to a minimum 01. The 
total profit to the capitalists who advance those wages 
is lyxp. But of this profit there are deductions to be 
made for interest varying from a maximum xy ^ to a 
minimum pc. The total amount chargeable as interest is 
thus represented by pxyc. If we can tax the surplus 
profit lye without touching wages or interest we shall 

^ It will of course often happen that the maximum interest charge does 
not come on the same unit of product where we have the maximum wages. 
To take proper account of this fact the figure would have to be made too 
complicated for our present purposes. 



470 GOVERNMENT REVENUE. 

obtain our revenue with the minimum of immediate bur- 
dens on producers and consumers and the least disturb- 
ance to the channels of trade.' 

§ 521. We have already seen (ch. ix.) that the differen- 
tial gain of producers enjoying special advantages is 
divided into two parts, rent and profits. The advocates 
of a progressive income tax claim that in a rough way 
they reach both of these things pretty effectively, since 
the large fortunes are made up from one or the other of 
these gains rather than from wages or interest. But the 
advocates of a single tax object to the attempt to put rent 
and profits on the same basis. They say that the sums 
received as profits are really earned. They come to pio- 
neers who have led the way in industrial progress. They 
are instrumental in putting the control of industry into the 
hands of men who are competent to take the lead. Rent 
on the other hand they regard as a dead weight ; as an 
appropriation of the products of present industry by those 
who have laid hands on the results of past service or of 
natural bounty ; sometimes even as a premium to those who 
stand in the way of progress by keeping land out of use 
until the growth of population has given it the increased 
value. They draw a sharp distinction between the profits 
resulting from the enterprise of the individual, to which 
that individual may fairly lay claim, and the rent resulting 
from the movements of population, which equitably be- 
longs to the people. They propose either to make the 

^ This will serve to illustrate the important but not very clear proposition 
often laid down, that rent is not an element in the price of products. Any- 
thing that affects wages or interest tends at once to affect the supply at pre- 
viously existing prices, and to cause a change in the adjustment of supply and 
demand. A change in economic rent will not produce this result, because it 
does not affect the marginal producers — those who are just ready to increase 
or diminish the supply by entering or leaving a business. A remission of 
English rents would not change the price of wheat materially, because it 
would not increase either the amount of land cultivated or the amount raised 
per acre. Rent is a result of variations in demand rather than a cause of 
changes in supply. 



THE SINGLE TAX. 47 1 

land common property and let this gain accrue to the 
public (land nationalization ' ) or to leave the title in 
private hands as at present, but tax economic rent to its 
full amount in lieu of all other taxes (single tax theory). 
The latter proposition, in its modern shape,'' owes its chief 
importance to the popularity of the writings of Henry 
George. 

§ 522. The first difficulty with the modern single-tax 
theory arises from the fact that we cannot make any such 
'sharp distinction between rent and profits as it contem- 
plates. They shade into one another by insensible grada- 
tions. Though rent is more permanent than profits, we 
cannot regard it as enduring for all time, since land may 
lose value as well as gain it. Though rent is chiefly due 
to the growth of population rather than to the controlling 
hand of an individual, we find that the man who goes 
into land speculation without special skill in serving the 
public (§ 322) is apt to lose rather than gain. The ma- 
jority of gains in real estate speculation have been made 
by men who have developed property at considerable 
risk, instead of waiting for others to do it. Exceptions 
there are, and numerous ones ; but the general rule holds 
good that large returns on real estate have come to men 
who used their capital rather than to those who kept it 
idle. Nor has the proportion of failures been a small 
one. Superficial observers who see an assured fortune, 

' Land nationalization is more properly treated here than in chapter xii. 
because its advocates generally propose to leave the actual improvement of 
the land to private persons (at most, assisted by advances of government 
credit) and to treat the land as a source of revenue and an instrument of social 
policy rather than as a field of economic experiment by public authorities. 

^ The " Impot Unique" advocated by the physiocrats, while superficially 
resembling George's proposed plan, differed from it radically in principle. 
The physiocrats proposed to tax the surplus of food above what was neces- 
sary for the maintenance of the laborer ; while George deals with a surplus 
of market price above expense of production. The Ricardian idea of a dif- 
ferential gain which is so prominent in the latter proposal had not made itself 
felt in the former. 



472 GOVERNMENT REVENUE. 

are apt to think that it was so assured from the outset, 
and to overlook the fact that the gains, which we see, are 
survivals amid the wreck of less successful investments 
which have been forgotten. 

The single tax theory in its more pronounced forms 
would deprive the man who has made successful invest- 
ments in real estate of any surplus above the current rate 
of interest. Would it guarantee him against losses? If 
it did not do so, it would destroy the motives to invest 
capital in projects of land improvement. The public could 
not expect to play with the investor at the well known 
game of "heads I win, tails you lose." If on the other 
hand it gave such a guarantee it would find itself com- 
pelled to make good an amount of loss so large as to do 
away with the expected gains from the system. Losses 
on real estate are large enough at present, when each man 
acts at his own risk ; they would unquestionably be much 
greater if this risk was shifted to society as a whole. The 
amount and the certainty of economic rent are both 
habitually overestimated by the advocates of the single 
tax theory. 

§ 523. The ethical and political difficulties which stand 
in the way of the application of the single tax theory are 
even more pronounced than the economic ones. It is not 
a legal possibility to appropriate the whole unearned in- 
crement by any speedy process and to overturn, without 
compensation, a large number of recognized rights. The 
existence of law depends on the continuity of its applica- 
tion. The principle that private property must not be 
taken without compensation is no mere accidental phrase 
let fall by courts or constitution-makers. It is an axiom 
of political science. If the progress of society renders 
the abolition of an institution necessary, compensation 
follows as a matter of course." A very gradual increase 

^ The apparent exception in the matter of slavery in the United States was 
due to the fact that the slaveholders were in arms against the government. 



LAND NATIONALIZATION. ^.^^ 

of taxes on economic rent to which the owners might find 
time to adjust themselves, represents the utmost stretch 
of possibihty in this matter. Now if the fiscal success of 
the single tax is questionable when applied to the whole 
unearned increment, past as well as future, much more 
must it be so if we leave the past undisturbed and deal 
with the future only. 

This is the critical weakness in land nationalization 
plans like that with which John Stuart Mill's name was 
identified. The advocates of this plan proposed that 
England should buy out the landowners, and appropriate 
the future gain in value. No fault could be found with 
the equity of this proposal. But as a fiscal measure it 
was radically defective. Leaving out of account the 
inevitable losses due to a scheme of quasi-compulsory 
purchase, the scheme must have ended in disaster because 
the lands which it was proposed to buy have fallen in 
value instead of rising. Nothing could more conspicu- 
ously emphasize the fallacy of treating economic rent as 
an assured source of increasing returns, than the fact that 
Mill was led astray by it. He recognized that improve- 
ments in the arts tended to lower rent; but he assumed 
that increase in population would more than counteract 
any such tendency. The effect of modern methods of 
transportation, which make the whole world compete 
with the English wheat growers, lay outside the scope of 
his calculation. 

§ 524. These arguments do not militate against reforms 
in taxation which shall carry us in the general direction 
indicated by the single-tax theory. Wagner, after an 
investigation of the subject whose thoroughness is worthy 
of the highest praise, whether we can accept his conclu- 
sions or not, is inclined to look with favor on public ap- 
propriation of future increments in the value of citj' real 

The measure was recognized as one of confiscation, justified only by a state 
©f war. 



474 GOVERNMENT REVENUE. 

estate as distinct from agricultural land. Without going 
so far as Wagner, most economists would be willing to 
agree that more taxes should be assessed upon economic 
rent and less upon improvements. The present prac- 
tice of assessors in this matter is a good illustration of 
the misapplication of the principle of taxation according 
to ability. The holder of unimproved real estate gets 
no apparent income from it ; he is therefore taxed on only 
a small percentage of the market value of the property, 
while the owner of improved land must pay a correspond- 
ingly heavier tax. This puts a premium on the worst 
sort of land speculation. The man who serves society is 
burdened ; the man who stands in the way and tries to 
profit by others' progress is encouraged and helped. 

§ 525. Othei forms of direct taxation can be much 
more briefly dealt with. 

A poll tax is in frequent use ; but it is neither productive 
nor equitable, and stands as a relic of past methods rather 
than as a subject of present importance. 

An inheritance tax has much to recommend it in the 
fact that it takes property for the use of the state at the 
time when individuals least feel its loss. It is also easy of 
collection because all estates of deceased persons must 
come under cognizance of the probate courts, independ- 
ently of the question of taxation. It is usually so graded 
as to increase with the remoteness of the heir or legatee 
from the direct line of kinship with the deceased ; some- 
times increasing also, notably in a recent French law, with 
the size of the amounts received by each individual. The 
chief objections to such a tax are the possibility of evading 
it by donations before death, and the uncertainty of tli^ 
amount which it will produce in any given year, which 
makes it unavailable as a calculable source of immediate 
revenue. In spite of these objections, an increasing 
amount of government income is being collected by this 
method. 



INDIRECT TAXES. 475 

Taxes on occupations should be counted among direct 
taxes, though they approach closely to indirect taxes in 
some of their characteristics.* They are less used in 
England and in the United States than in other coun- 
tries, because of the double taxation which is involved 
when a man is taxed both on the value of his business or 
profession and on the fact of exercising it. Of taxes on 
occupations in the strict sense of the word, the one of 
most importance in the United States is the fee charged 
for licenses to sell liquor. In many communities this is 
not managed primarily for revenue, but as a means of 
restricting the number of those engaged in the business 
by reducing the profits to which it gives rise. 

Of greater importance from a fiscal point of view are 
the various taxes on corporate franchise. The vast 
amounts of personal property which can be reached in 
this way and in no other, coupled with the good grounds 
for special taxation furnished by the rights granted to 
companies of various kinds, make this a field of great and 
increasing importance for the tax legislator. A few of 
the most important practical rules for such assessment 
have been laid down in connection with the subject of 
certainty in taxation. The attempt to enter into further 
details would lead us beyond the scope of this book. 

§ 526. Indirect taxes may be divided into three groups : 
excise charges, export duties, and import duties. 

Excise or internal revenue charges, when fixed at small 
amounts, are often hardly distinguishable from fees. 
When they are large in amount, they constitute a tax on 
the consumers of the article, so obvious as to be quite 
unpopular. There is a tendency in the United States to 
confine the imposition of excise dues to trades connected 

' In some cases they are hardly distinguishable from fees. For instance, 
the money collected by special taxes on shipping may be regarded as a com- 
pensation to the government for the special services which it renders the 
navigator in connection vs^ith harbors, lighthouses, and hydrography. 



4/6 GOVERNMENT REVENUE. 

with the production of alcohol ; in the belief that a high 
price of liquor and restriction in its use is likely to be of 
advantage to the country, ■ Nations which have a customs 
tariff for revenue, and not for protection, often use excise 
duties as a means of preventing the loss of revenue 
that results from the establishment of a home industry 
which diminishes the importation of articles on which the 
tariff is imposed. 

Export dues are unpopular because they put the home 
producer at a disadvantage in international trade ; and 
they are falling into disuse on this account/ For the 
converse reason, taxes on imports are correspondingly 
popular. The apparent advantage to home industry con- 
nected with the imposition of such taxes, coupled with 
the convenience of the national frontier as a place of tax 
collection, tends to give import duties an over-prominent 
place in modern fiscal systems. 

§ 527. For purposes of revenue, indirect taxes have 
several disadvantages as compared with direct taxes. We 
have already seen the difficulty of using them for local 
purposes. Even when applied for national objects it is 
hard to predict the amount which they will yield. The 
process of shifting the tax is often accompanied by a con- 
traction in the volume of business which makes the return 
less than was anticipated. In years of depression when pro- 
ductive taxes are most needed, this contraction often be- 
comes disastrous. The loss of revenue from indirect taxes 
in bad years is more conspicuous than in the case of direct 
taxes and far less easy to remedy. For if the rate of 
indirect taxation is raised to meet the emergency, the 
result is sometimes just the opposite of what was in- 
tended. The experience of the United States in taxing 
distilled spirits shows that more revenue is often obtained 
by a low rate than by a high one. The high rate at once 

* For a similar reason countries with an extensive excise system usually 
refund the tax on articles actually exported. 



FINES AND FORFEITURES. 4// 

checks consumption and stimulates evasion ; so that any 
increase in the tax rate beyond a certain moderate figure 
is more than counterbalanced by a diminution in the 
amount that pays taxes. 

In the case of high import duties a third cause often tends 
to increase the loss of revenue still further. If the article 
is one which can be produced in the home country, 
domestic production tends to take the place of imports. 
To avoid this loss, England adopts the principle of plac- 
ing an excise on the home product substantially equal to 
the import duty. Most countries, however, find the 
protective feature a popular one. Some content them- 
selves with the " incidental " protection afforded by a 
tariff framed for revenue purposes. Others, instead of im- 
posing the minimum rates which will secure the required 
revenue by a low tax on large imports, adopt the maxi- 
mum rates which will secure this result by a high tax on 
small imports ; thus adopting a system of duties framed 
for protection with incidental revenue. 

§ 528. Closely analogous to the restrictive taxes just 
described are the fines^ and forfeitures exacted from 
criminals. In former times these constituted a very con- 
siderable part of the revenue of powerful governments 
which stretched their criminal jurisprudence to meet their 
fiscal necessities. This matter has become much less im^ 
portant to-day. The criminal law is narrower in its scope. 
The offense of high treason, which has been made the 
pretext for enforcing most extensive forfeitures, is now 
for obvious reasons much rarer than under the more 
anarchic conditions of feudal times. Under the well- 
grounded feeling that it is unjust to make a man's heirs 
suffer for his misdoings, penalties are made to attach to 
his person rather than to his estate. He may be com- 

^ Many of the mediaeval fines were unconnected with criminal law and 
were theoretically fees for special services, e. g., those connected with the 
estates of minors and females. 



4/8 GOVERNMENT REVENUE. 

pelled to make good his damages to another individual ; 
but a payment to the government as a punishment for a 
crime is often felt to be one which bears too lightly on 
the individual and too heavily on his family. 

The revenue from confiscation of the property of ene- 
mies has also ceased to have the importance which it did 
in feudal times. When war was frequent, and the obliga- 
tions of international law and justice were unrecognised, 
such transactions were a source of much profit to the con- 
queror. To-day such appropriation of private property 
of enemies as a means of revenue is generally condemned ; 
and even the demands for contributions from public 
authorities in a hostile nation are at least theoretically 
based on the cost incurred by the victor in carrying on 
the war. The very name " indemnity," which is so fre- 
quently applied to such contributions, is an illustration of 
this theory. 

The revenue of governments from failure of property 
to find an owner {escheat) is of trifling amount where free- 
dom of testamentary bequest is a recognized principle of 
law. That which comes from voluntary contributions is in 
modern states almost entirely predestined to special uses, 
and need not be treated as a part of the ordinary revenue. 

§ 530. In a well-ordered budget, the taxes will generally 
be so arranged that the current revenue of the govern- 
ment is large enough to meet its current expenses. If 
this is not accomplished, a deficit is carried over to subse- 
quent years in some form oi public debt. 

If the government simply leaves its bills unpaid, letting 
the creditors get what security they can, the result is an 
unfunded ox floating debt. If the government pays these 
bills by issuing formal obhgations to pay interest (and 
usually principal also) at dates distinctly specified, and 
borrowing money on the basis of these obligations, the 
debt is said to he ftmded. When these obligations set a 
date for payment of the principal {inatiirity) they are 



PUBLIC DEBTS. 479 

known as bonds. When the principal is paid by the 
isssue of a new loan, whether at maturity or before it, 
the operation is known as refunding. 

§ 531, A nation cannot permanently rely on loans to 
meet any considerable part of the ordinary expenses of 
the government. Creditors will not trust the agents of a 
treasury which is managed in this way. They will either 
demand payment in advance, as manufacturing firms 
habitually do in making large sales to semi-civilized gov- 
ernments, or they will insist on exercising so much control 
over the fiscal machinery of the debtor government as to 
deprive it of a good deal of its freedom in conducting 
its own affairs. A government cannot compel foreign 
customers to give it credit without security. It may ex- 
ercise a pressure on domestic customers which shall tempo- 
rarily force them to do this ; but the immediate effect of 
this is a tax on such customers, thinly veiled under the 
form of a loan. Such a tax, if persisted in, is almost cer- 
tain to prove disastrous alike to the customers and to the 
government. It is a discriminating and destructive tax 
upon the very people on whom the government most 
directly depends for its current supplies. 

One of the commonest and at the same time most de- 
structive forms of forced loan is an issue of irredeemable 
currency. Any gain to the government on a few transac- 
tions is offset by the greatly increased prices charged by 
those who deal with it in all subsequent transactions. If 
such currency is ultimately redeemed, its inflated volume 
is a long and painful burden on the future taxpayers of 
the nation ; if it is not redeemed, it carries the govern- 
ment and many of the citizens into virtual bankruptcy. 

§ 532. There are apparently but two cases where re- 
course to loans is necessary or desirable : i. In an extraor- 
dinary emergency like war.' 2. In the case of permanent 

^ The only other analogous cases would be those of flood or fire, where 
present relief must be had at any cost. 



480 GOVERNMENT REVENUE. 

productive investments, like state railroads or telegraphs^ 
which are made once for all, and offer the prospect of 
national and fiscal advantages for a long series of years. 

It is thought by some observers that a loan transfers 
the cost of a war or an improvement from the present 
to the future. This view is ridiculed by others who say 
that the cost of a war is borne by the generation which 
wages it, and that a loan simply shifts this cost from one 
group of individuals to another. This misunderstanding 
arises from the two different sources of the word cost. 
The cost in the public sense is borne by the people who 
carry on the war, not by their children. The destruction 
of wealth is a destruction of present means of enjoyment; 
the pain is present pain. But the individual cost or ex- 
pense is shifted. The men who loan money to a govern- 
ment enable a certain amount of wealth to be devoted to 
destruction, just as much as if that money were extorted 
from them by taxation. But they do not part with their 
individual wealth or property. On the contrary, they 
retain, in the form of a government bond or other obliga- 
tion, the right to ample indemnification from the taxpayers 
of the future. Wealth is destroyed, but property rights 
and relations are conserved. 

§ 533. The great advantage of loans over taxes as 
means of waging war is that they enable the government 
to secure unequal contributions of capital from different 
citizens. The guarantee of repayment does not lessen to 
any material degree the aggregate amount of things 
destroyed ; but the government can get those things with 
far less ill-will, because each citizen does not suspect the 
treasury of exacting an unfairly large share from him and 
an unfairly small one from his neighbor. The promised 
indemnity for the expense makes the cost more easily 
borne. It becomes possible to secure the aid of foreign 
capital which could not be obtained by taxation. In fact, 
the apparent lightness of the burden of loans at the outset 



DANGERS OF EXCESSIVE BORROWING. 48 1 

of a war as compared with that of taxes, constitutes one 
of the chief dangers of the system. The voluntary contri- 
butions of the sanguine are exhausted at the beginning, 
and the government is then compelled to have recourse, 
under most unfavorable circumstances, to those who are 
not so well-affected to the national cause. If it calls for 
additional loans, they are negotiated at very high rates of 
interest ; if new and burdensome taxes are imposed, they 
have to be extorted from unwilling hands by a govern- 
ment whose powers are already overstrained by the diffi- 
culties of its situation. If a nation goes into a war with 
its eyes open,' its statesmen will strive to impose the 
maximum of taxation at the outset, and resort to loans 
only as the power to bear new taxes becomes exhausted^ 
In this way it can command the maximum of capital,, 
both in the form of taxes on the unwilling, and of loans, 
from the willing ; while it can obtain the borrowed capital 
at relatively low rates of interest, and thus lessen the 
burden on the future taxpayer. 

§ 534. In the case of debts for industrial enterprises 
which do not promise a commercial retujrn, the same rule 
should be applied which has been given for war debts. 
They should be reduced to a minimum ; the only differ- 
ence being that the extraordinary expenses which these 
enterprises involve should often be met by increase of 
assessments rather than by increase of taxes. Sewers,, 
harbor improvements, highways, and other things which 
cannot pay for themselves commercially, i. e., for whose 
use the community cannot charge a remunerative price, — 
should in general be paid for by assessment or not built at 
all. This may seem a hard rule ; in some cases it really is. 

* The policy of the United States Treasury at the opening of the Civil 
War was the reverse of this. It was partly justified, though not wholly so, 
by the fact that the North did not go into the war with its eyes open to the 
cost, and would have refused to make sacrifices in 1861 which it was ready 
to make two or three years later. 
31 



482 GOVERNMENT REVENUE. 

But the enormous number of mistakes made in borrowing 
money for things which can not and do not pay for them- 
selves shows how unsafe it is for government authorities 
to judge whether the public necessity of such enterprises 
warrants putting heavy burdens on the future taxpayer. 

§ 535. Equally bad are the results which arise from 
borrowing money for enterprises whose commercial profit 
is speculative. Loans in aid of railroads often promise a 
return both in public convenience and in fiscal advantage, 
Vi^hen in point of fact the road is so tardily completed as 
to furnish neither. In so conservative a state as Massa- 
chusetts, a large part of the municipal subscriptions in 
aid of railroad building have been given to railroads that 
either were not built at all, or did not become available 
for use until many years had elapsed. 

§ 536. The case of loans for industrial improvements 
which promise a sure return is different, at least in theory. 
Instead of raising as large a part of the expense as 
possible by taxation it is enough if we keep the loan 
within such limits that the investment is sure to pay 
interest and make such slight annual contributions to the 
payment of the principal as are warranted by the char- 
acter of the business. If the original form of the capital 
is liable to become antiquated in twenty years' time, its 
cost and income should be so adjusted that the current 
returns will extinguish the principal within twenty years. 
The agency by which this gradual extinction of debt is 
accomplished is known as a sinking fund} 

§ 537. The attempt to apply the sinking fund system 

^ The detailed working of various sinking fund systems, and the questions 
involved in the sale or purchase of bonds above par, belong to a treatise on 
finance rather than to one on general economics. As a rule, it appears to 
be a wise provision for a government, as well as for a private corporation, to 
insert in all its bonds a clause stipulating a right to redeem them before 
maturity, at a price slightly in advance of their par value ; say at no. 
This does not interfere with the readiness of the-public to take the original 
loan, and it often greatly facilitates the operation of repayment or refunding. 



PAYMENT OF PUBLIC DEBTS. 483 

to war debts usually involves a good deal of juggling with 
figures. Nor has it any natural basis in theory. There 
is no definite time within which a war debt ought to be 
repaid, because there is no definite date at which a nation 
can expect another war. If bonds can be placed on the 
market at a lower rate of interest when they contain a 
sinking fund provision, such a clause may wisely be in- 
serted/ But in general the only safe rule about a war 
debt is to pay it off as fast as the resources of the country 
will allow. The slight disturbance to individual investors 
is more than made up by the reserve strength which free- 
dom from debt gives the government. Had the United 
States, in 1861, in addition to its other difificulties, labored 
under an inherited burden of old war debts, it would have 
been disastrously weakened. Even in the case of debts 
for industrial improvement it would generally be better if 
provision were made for paying them off more rapidly. 
Very few improvements pay for themselves within the 
time anticipated. For one case like the Erie Canal, 
which did better than its promoters expected, we have 
a hundred cases which fail to pay for themselves at all, 
and which leave a burden of interest with no real increase 
of the means of repayment. Witness the enormous in- 
crease of municipal indebtedness in recent years, and of 
the burdens connected with it ; burdens so great as to 
lead to the enactment of arbitrary provisions limiting 
the amount of debts which municipal authorities may 
legally contract. 

§ 53^- It must never be forgotten in matters of public 
finance that the treasurers of our nations and municipali- 
ties are dealing with government property and not with 

' The use of terminable annuities by which a man gives a certain amount 
of capital to the government in consideration of receiving a determinate 
payment during his lifetime, combines the two advantages of attracting the 
capital of a certain class of investors, who have no families to provide for, 
»nd of providing for the gradual extinction of the obligations of the govern- 
iaent by the death of the annuitants. 



484 GOVERNMENT REVENUE. 

public wealth. The fact that capital is in the hands of 
public authorities does not necessarily make the national 
wealth any greater than it would be if left in the hands of 
individuals or corporations. Public authorities may do 
some good things which private individuals cannot ; they 
may also do some bad things which private individuals 
can be prevented from doing. Unless fiscal checks are 
rigidly applied and fiscal deficits made up by present 
taxation rather than by promises for the future, the 
danger of waste far outweighs the probability of good. 



INDEX. 

The numbers refer to pages. 



Absentee ownership, of land, 130, 
131 ; of railroads, 174 

Abstinence, 268. See Saving. 

Accidents, insurance against, 59-63; 
liability for, 350 

Accounts, income and capital, 5 ; 
as form of credit, 234 ; deprecia- 
tion, 292 

Accumulation, 46, 96 ; motives for, 
116 ; excessive, 147 ; increase of, 

340, 341 

Acworth, W. M., 151 

Adams, C. F., 151 

Adams, H. C, 397 

Administrative functions of govern- 
ment, 392-403 

Ad valor etn duties, 457 

Advertising, 70, 384 

Advisory commissions, 177 

Agencies, irresponsibility, 155, 156 ; 
expense, 385 

Agricultural labor, early history of, 
35 ; under English poor-law, 54 ; 
advances to, 57-59 ; burdens on, 
367, 368 ; hours of, 406, 407 

Agriculture, development of, 127, 
128 ; characteristics, 151, 152 

Allotments, 58, 59 

Altruism, 14 

American Civil War, 37, 440, 481. 
See United States 

Anarchists, 355 

Annuities, 483 

Appreciation of gold, 210-214 



Apprenticeship, statutes of, 368 

Arbitrage, 105, 241 

Arbitration of labor disputes, 357- 

362 
Aristotle, 21 

Art of political economy, 2, 12 
Ashley, W. J., abridgment of Smith, 

10 ; on English Economic History, 

35, 65, 121, 136 
Assessment of taxes, 452-457 
Assessments, 447—449, 481, 482 
Associations of productive labor, 58 
Assurance, contract of, 137 
Atkinson, Edward, 40, 339, 341, 385 
Attachment of wages, 122, 143 
Australian gold, 209 
Austria, workmen's insurance in, 62 
Austrian school, 80, 93, 274 
d'Avenel, French economic history, 

34. 189 

Bagehot, Walter, 232 

Balance of trade, 427—429 

Bank, Banking, 235-259 ; notes, 192, 

247-259 ; checks, 193, 241-247 ; 

cooperative, 386-390 
Bank of England, 191, 252, 253, 257 
Bank of France, 255 
Bank of United States, 255 
Bargaining, 72, 84 ; between labor 

and capital, 366, 367 
Barter, 71, 233 
Bastable, C. F., 447 
Bastiat, F., 15 ; on interest, 137 

485 



486 



INDEX. 



Bentham, Jeremy, i6 

Bill broker, 244 

Bill of exchange, 239-244 

Bimetallism, 208-224 

Birth rate, 42, 43 

Bland Act, 222 

Boehm-Bawerk, E. v., on capital and 

interest, 264, 269, 274 
Bonar, J., on Malthus, 26 
Borrowed capital, speculation on, 

112 
Bottomry, 280 
Bounties, 135, 424 ; to shipping, 

442, 443 
Boycott, 359, 360 
Brassage, 187 
Brassey, T., on wages, 303 
Brentano, 352 
Briggs collieries, 374 
Budget, 449, 478 
Building societies, 387-390 
Bullion certificates, 191 
Bureaus of information to labor, 59 
Bye-products, 89 

Cairnes, J. E., 64 ; on demand, 74, 

79. 332 

California, currency in civil war, 
189 ; gold, 209, 219 

Canada, banking in, 254 

Canals, 394-396 

Capital, contrasted with income, 5, 
27 ; different meanings, 6, 7, 312, 
313 ; origin of, 30 : as a preven- 
tive check to population, 49, 50 ; 
needed for legitimate speculation, 
III ; merits and defects of sys- 
tem, 1 18-120; investment of, 121- 
150; fixed, 125, 151; combination 
of, 1 51-179 ; money as, 181 ; and 
interest, 264-281; effect on wages, 
311-318 ; conflicts with labor, 336 
-369 ; taxation of, 463-464 

Capital account, 5 

Capital goods, 7 



Capitalization, 138 

Carey, H. C, on rent, 293 

Carrying trade, 441-443 

Centralized banking, 251 

Certainty in taxation, 451 

Charity, 51-57 

Cheap labor, 328-333 

Checks to population, 41-51 

Checks (bank), 193, 241-247 

Chevalier, M., 422 

Children, employment of, 345—349, 
405, 409, 410 

Chinese immigration, 420, 421 

Circulation, 192-197, 296 

Cities, growth of, 537, 407 ; death 
rate, 347 ; taxation of real estate 
in, 473, 474 

Civil service reform, 402 

Clark, J. B., on capital, 7 ; on im- 
puted value, 274 

Clearing house, 235-237, 257, 258 ; 
railway, 158 

Coal trade, 344 

Cobden, Richard, 422 

Cohn, G., on railroads, 151 ; on 
finance, 447 

Coin certificates, 191, 259 

Coinage, 185 ; free, 186 

Colbert, 450 

Collectivism, 355 

Colonization, 445, 446 

Combination, 73, 85, 86, 90 ; of 
speculators, 107, 108 ; of capital, 
1 51-179 ; commercial and indus- 
trial, 159; of labor, 352; laws 
against, 352-354 ; international, 
438 

Comfort, standard of, 48 

Commerce, 65, 427 

Commercial competition, 87 

Commercial paper, 243, 244 

Commercial crises, 295-299. See 
Crises. 

Commissions of experts, 177, 362 

Communists, 355 



INDEX. 



487 



Commutation, of labor dues, 35 ; of 

profits, 269-271 
Compensation, 149 
Competition, 73-96 ; commercial and 

industrial, 87 ; of capital, 117, 118, 

264-266; in large industries, 152, 

156, 161, 162 ; of laborers, 364- 

368, 412 ; international, 430-432 ; 

effect on incidence of taxes, 461, 

467-469 
Comte, Auguste, 18 
Conciliation, 361, 362 
Confiscation, 477 

Conservatism, necessity for, 32, 33 
Consolidation, 158, 159 
Consumers' cooperation, 382-389 
Consumers' surplus, 90, 91, 266 
Consumption, 318-335 ; diversified, 

66, 334 ; intelligent, 70, 335 ; 

effect on demand, 79 ; affected by 

tariff, 438, 439 
Consumption loans, 270 
Contract labor, 41T ; convict, 413- 

417 ; foreign, 417, 418 
Contracts, for future delivery, 108, 

160 ; standard of, 181 
Control of capital, 117, 269, 270 
Convict labor, 413-417 
Cooperation, 379-390 
Copper syndicate, 85, 163, 164 
Copper tariff, 436 
Copyright, 134, 135 ; international, 

444 
Corn rent, 182 
Corners, 107, 160 
Corporations, 143-146 ; taxation of, 

454, 462, 475 
Cossa, L., I 
Cost, of labor, 302—304 ; of services, 

305 
Cost of production, 123, 86, 94 ; 

difficulty of ascertaining, 169, 436; 

of precious metals, 184, 211 
Credit, 181, 232-263 ; advances to 

laborers, 56, 58, 381, 382 



Creditors, 206-213, 227-230 

Criminal classes, 48, 51 

Crisis, Crises, 214, 250, 252, 258, 

295-299, 343-345 
Currency, 193 ; and interest, 277, 

278 
Current expenses, 153, 154 
Custom and prices, 65, 69, 70, 73, 

83-85 ; and wages, 307, 331 
Customs duties, 422-441, 457 

Dabney, \V. D., 151 

Darwin, 18, 19 

Death rate, 42, 43 

Debasement, 188 

Debtors, 206-213, 227-230 

Debts, foreign, 426 ; in taxation, 

453, 454 ; public, 478-484 
Deduction, deductive methods, 23- 

25 
Degeneration, 22, 46 
Demand, 74-80, 87 ; curve of, 77, 

88, 326 ; reciprocal, 79, 332 ; for 

labor, 308-320 
Demonetization of silver, 217, 220, 

221, 226 
Density of population, 43, 45 
Dependent classes, 51 
Deposits, 244-248 

Depreciation account, 170; depre- 
ciation of money, 190, 210-214 ; 

of capital, 292 
Depression of trade, 295-299. See 

Crisis 
Desire and demand, 75, 79 
Destruction of wealth, 31, 308-310 
Deterioration, 80, 81 
Differential gain, 285-291, 304, 468, 

469 
Differential rates, 157 
Diminishing return, law of, 43, 154, 

155 
Direct expense, 173 
Direct taxes, 459-475 
Directors' responsibility, 178, 179 



488 



INDEX. 



Discount, 244, 246 ; of product by 

capitalist, 274, 301 
Discriminating rates, 155, 156, 159, 

178 
Disutility, 123 

Distribution. See Profits, Trans- 
portation, Wages 
Diversification of industry, 433 
Dividends, limitation of, 166-168 
Division of labor, 66, 350, 351 
Division of traffic, 156-158 
Dollar, 220, 221 
Domestic economy, 44 ; domestic 

system of industry, 357, 413 
Domestic exchange, 237, 238 
Domestication of animals, 27 
Domination substituted for annihila- 
tion, 20, 21, 31, 32 
Donisthorpe, W., i 
Doses of capital, 274, 275 
Double taxation, 451 
Drage, G., on the unemployed, 26 
Dunbar, C. F., on banking, 232 
Duration of labor power, 302 
Duties on imports, 422-441, 457 
Dynamic conceptions and problems, 
5, 23, 24 

Earnings, gross and net, 456 

Economic history, 24 

Economic man, 16 

Economics, origin of, 2 ; general 

history of, 8-18 ; use of term, 12, 

13 ; methods, 23-25 
Economist, index numbers, 194 
Economy of consumption, 328, 329 
Education, 69, 334, 335 
Effertz, O., 31 
Efficiency and visages, 303, 328, 329, 

365 
Egoism, 14 

Eight-hour movement, 405-409 
Elasticity of currency, 245 
Electricity, 170, 171 
Ely, R. T., on labor, 336 



Emancipation, 35-40 

Emergency relief, 55, 56 

Eminent domain, 149 

Emotion in economics, 17, 49 

Employers' liability, 350 

Enclosures, 3 

Engel's law, 325 

England, poor relief in, 51, 53-55 ; 
speculation in, no; limited lia- 
bility in, 145 ; directors' responsi- 
bility in, 178, 179 ; mint, 186 ; 
Bank of, 191, 252, 253, 257 ; 
factory legislation, 349, 350; labor 
organization, 352-356 ; coopera- 
tion, 383 ; tariff policy, 422, 423 ; 
shipping, 441-443; colonial policy, 

445, 446 
Equality, social, 41 
Equality in taxation, 451, 465 
Equalization of supply, 106 
Equation of supply and demand, 

76, 265 ; of labor, 306 
Escheat, 478 
Ethical selection, 49 
Ethics and economics, 18-25, 91-96, 

120 
Exchange, of go©ds and services, 70 

-96 ; domestic and foreign, 237- 

241 
Excise, 475, 476 
Exemptions from taxation, 465, 

466 
Exhaustion of soil, 433, 436 
Expenditure and wages, 308-310 
Expense of production, 88 
Export dues, 476 
Exports, 424-427 
Expropriation, 149 

Fabian Society, i, 409 
Factory acts, 17, 69, 349, 350 
Factory insurance, 60-62, 385, 386 
Factory system, 336-363 
Falkner, R. P., 194 
Familistere, 372 



INDEX, 



489 



Family property, 32 ; family respon- 
sibility, 44-51 

Famine, 39, 40, 46 

Farrer, T. H., 151, 167 

Farmers' Alliance, 262 

Farms, value of, 293 

Fawcett, H., on pauperism, 26 

Fees, 121, 447-449 

Feudal system, 29, 34, 64, 127 

Final utility, 79 

Fines, 477 

Fire insurance, 99; cooperative, 385, 
3S6 

Fisher, Irving, 5 

Fixed capital, 125, 152-155, 291- 

295, 345 
Food, as a measure of vsrealth, 9 ; 

supply of, 43-45 
Foreign exchange, 238-241 
Foreign trade, 427-429, 441-443 
Forests, 131, 394, 436 
Forfeitures, 477 
Fractional currency, 188 
France, and the Malthusian theory, 

50 ; railroad system of, 162, 168 ; 

mint, 186 ; bimetallism in, 219, 

220 ; Bank of, 254 ; assignats in, 

262; courts of conciliation in, 362; 

cooperation in, 379 ; tariff policy, 

422, 423 ; shipping, 443 
Franchise tax, 475 
Free coinage, 186 ; of silver, 219- 

221, 224-226 
Free communities, 28, 29 
Freedom, 22 
Free labor, 37, 44 
Free trade, 66, 422, 423, 431 
Freights, ocean, 429 
Friendly societies, 61, 386 
Funding, 478 
Futures, 108 

Gain-sharing, 378 
Gambling, 97, 98, 106-108 
Gas works, 154, 170 



George, Henry, on Malthus 45 ; on 
capital 113, 114, 137 ; on land 
ownership, 150, 288, 292 ; single- 
tax theory, 468-473 

Germany, workmen's insurance in, 
60-62 ; usury laws of, 140 ; rail- 
road advisory boards, 177 ; bank- 
ing in, 254, 255 ; state railroad 
management in, 400, 401 ; tariff 
policy, 423 

Giddings, F. H., on sociology, 26 

Gide, C., 424 

Gilbert's Act, 54 

Gilds, 352, 367, 379 

Gilman, N. P., 370 

Goethe on human evolution, 22 

Gold, stock of, 183 ; standard, 190 ; 
scarcity of, 204, 224 

"Gold and Silver Commission," 
208 

Gold speculation, 109 

Goschen, G. J., 232 

Government, management of indus- 
try by, 390-403; historic functions 
of, 391-393 ; revenue of, 447-484 

Government insurance, 61 

Government notes, 259-263 

Great Britain. See England. 

Gresham's Law, 189, 218 

Ground rent, 287 

Groups, as units of natural selection, 
19-22 ; non-competing, 330-332 

Gunton, G., 434 

Hamilton, Alexander, 242 

Hawley, F. B., 342 

Health, public, 67 

Hegel, influence of, 18 

Heredity, 19 

Historical method. Historical school, 

23-25 
Hobson, J. A., 336 
Holyoake, G. J., 370 
Home market, 428-430 
Homes of operatives, 68, 347 



490 



INDEX. 



Hours of labor, 320-325 ; voluntary 
reduction, 327 ; movements for 
forced reduction, 343, 349, 403- 
410 

Housing of poor, 67, 68 

Howell, G., on labor, 336 

Human evolution distinguished from 
animal, 21 

Hunting stage, 26, 27, 45 

Immigration, 330, 331, 405, 417- 
422 

Imports, 424-427 

Imprisonment for debt, 143 

Improvements, effect of, 4 ; public, 
481-484 

Imputed value, 274, 275 

Incidence of taxation, 458-461 

Income account, 6 

Income contrasted with capital, 5, 
340, 341 

Income tax, 463-467 

Increasing return, 154, 155 

Index numbers, 193-195 

Indirect taxes, 459-463, 477-479 

Individual wealth, 3, 4 

Individualism, 14, 17, 18, 22, 165 

Industrial competition, 87 ; indus- 
trial speculation, 11 2-1 20 

Inequality of conditions, 41, 94, 329 

Infanticide, 46 

Infant industry, 433-440 

Inflation, 190, 228-231 ; bank-note, 
249, 250 

Inheritance tax, 474 

Insurance, 99, 100 ; of workmen, 
60-63 ; and business profits, 288, 
289 ; manufacturers', 349, 385 ; 
cooperative, 385, 386 

Intellectual morality, 49 

Interest, 267-281; what it measures, 
6 ; system of, 136-143 ; on short- 
time paper, 200, 201 ; and cur- 
rency, 212 

Internal revenue, 475, 476 



Interstate Commerce Commission, 
177 ; Interstate Commerce Law, 
178 

Investment of capital, 121-150 

Ireland, rents in, 131 

Iron trade, 344 

Irredeemable paper, 192, 229-231 

Irregularity of employment, 302 

Irrigation, 394 

Italian railroad commission, 402 

Jevons, W. S., on utility, 64, 80; 
on money, 180 ; on labor, 332, 
336, 360 ; on government owner- 
ship of monopolies, 397-399 

Joint cost, 89, 171-173 

Joint-stock companies, 143-146 

Judicial rent, 131 

Keynes, J. N., i 

Knies, K., 5 

Knights of Labor, 355, 359, 360 

Labor, origin of, 27, 28 ; of slaves, 
28-30 ; relation to property, 30, 
34; emancipation of, 35-40; right 
to, 54 ; public employment for, 
56-59 ; colonies, 58 ; division of, 
66, 329-331, 350, 351 ; combina- 
tion of, 160, 352 ; price of, 213 ; 
remuneration of, 301-333; de- 
mand for, 308-320 ; variation in 
character, 326-333 ; and machin- 
sJ^y. 336-369; organization, 352- 
369 ; legislation, 349, 350, 404- 
440 

Laborers, advances of state credit 
to, 58, 381, 382 

Labor-saving machinery, 338, 339 

Laissez faire, 12 

Land, improvement, 57; tenure, 127- 
133 ; speculation, 132 ; grants of 
public, 135, 136 ; taxation, 453, 
454, 471, 472; nationalization, 
468-474 



INDEX. 



491 



Lassalle, F., 58, 381, 382 

Latin Union, 219, 220 

Laughlin, J. L., 180 

Law, meaning of, 13 ; respect for, 

33 

Law of diminishing return, of popu- 
lation, etc. See Diminishing re- 
turn. Population, etc. 

Leclaire, 373 

Legal tender, 185, 262 

Legislative fixing of rates, 84, 85, 
168, 173-175 

Legitimate speculation, 100-106, 120 

Leisure, 321 

Leroy-Beaulieu, 447 

Levi, Leone, 404 

Liability of employer, 350 

Liberty, 11, 14, 22 

Life insurance, 99, 138, 139, 386 

Limited liability, 143-146 

Liquor traffic, 67, 334, 335 

List, r.. 434 

Living wage, 363-366 

Loan associations, 387-390 

Loans, 136-143, 269-274; industrial, 
229, 230 ; of banks, 243, 244 ; 
government, 478-484 

Local banks, 250, 251 

Local discrimination, 178 

Local taxation, 462 

Localization of poverty, 32, 49 

London, a clearing house for inter- 
national trade, 241 

Longe, on wages, 316 

Loria, on social evolution, 26 

Losses on fixed capital, 288-299 

Luxury, 333, 334 

Machinery, over-production of, 147 ; 

effect on interest, 279 ; effect on 

labor, 336-369 
MacCuUoch on capital and wages, 

313, 315 
MacLeod, H. D., 232, 242 
Maintenance account, 174, 292 



Malthus, Essay on Population, 41 

Malthusian theory, 41-51 

Man, struggle for existence in, 19- 

23 

Management, earnings of, 267, 268 

Manor, 64, 65 

Manufacturers' insurance, 385, 386 

Margin of cultivation, 305 

Marginal utility, 79 ; marginal units 
of labor and capital, 274, 275, 2S9 

Margins, 107, no 

Market, 74, 428-430 ; economy of 
large, 127 

Market price, 75-87 

Marriage as preventive check to 
population, 50 

Marshall, Alfred, on price, 64 ; on 
monopoly, 151 

Marx, Karl, on capital, 7, 121 ; on 
value, 95, 343; on profits, 288 ; on 
hours of labor, 343 

Massachusetts, limited liability in, 
145 ; railroad commission, 177 ; 
state bank-note issues, 255 ; fac- 
tory legislation, 349, 350, 408 

Matriarchate, 46 

Mayo-Smith, R., on emigration, 404 

Mechanics' lien, 122 

Mediaeval Europe, economic changes 
in, 34-36 ; labor in, 307 

Medium of exchange, 181 

Menger, C, on money, 182 ; on im- 
puted value, 274, 332 

Mercantile system, 8, 9, 423-426 

Merchant marine, 441-445 

Metallic money, 183 

Metayers, 36, 131 

Methods of enquiry, 23-25 

Migration, 417-422 

Military government, 401 

Military necessity, 36 ; arguments 
for protective tariff, 440 

Mill, J. S., on liberty, 11 ; on joint 
cost, 89 ; on money, i8o ; on 
credit and prices, 246 ; on wages, 



492 



INDEX. 



316 ; on international demand, 
332 ; on land nationalization, 473 

Mining claims, 128, 129 

Mint, 186 

Money, 180-231 ; no measure of 
public wealth, 3, 8, 9 ; character- 
istics, 71 ; of account, 181 ; paper, 
190 ; value of, 193 ; efforts to 
economize, 232-234 ; accumula- 
tion of, 425 

Money lenders, 39 

Monometallism, 211-224 

Monopoly, 73, 84, 88 ; legislative 
grants of, 133-135 ; of combined 
capital, 159-164 ; effect on theory 
of profits, 285 ; of labor, 367, 
368 ; in hands of government, 
396-403 ; effect on prices, 448 ; 
taxation of, 467-474 

Morley, John, on compromise, 11 

Muhlhausen, operatives' dwellings 
in, 68 

Municipal insurance, 386 ; manage- 
ment of industry, 402 

Napoleon III., 422, 444 

National banks of the United States, 

256-257 
National income, wealth, etc. See 

Public income, wealth, etc. 
Nationalists, 355 
Nationalization of property, 5, 393- 

403 

Natural law, 13 

Natural rights, 148 

Natural selection, 19, 51 ; of capir 
talists, 115, 119, 361 

Natural value, 148 

Navigation acts, 441 

Negative rent and profit, 288-298 

Negro, 37, 38 

Net profit, 267, 285-291, 456 

Newcomb, S., on capital, 5 ; on in- 
dustrial circulation, 296 

New countries, profits in, 281—283 



Newmarch, W., 232 

New unionism, 355, 356 

New York Clearing House, 237 ; 

loan certificates, 257 
New York State banking law, 255 
Nicholson, J. S., 180 
Nihilists, 355 
Nitti, on Malthus, 48 
Nominal wages, 123, 301, 302, 309— 

3", 425 
Non-competing groups, 330-333 
Normal price, 87-91, 93 ; of gold, 

202-206 

Occupancy, 30 

Occupations, choice of, 95, 330-332 ; 

taxes on, 474, 475 
Organization of labor, 352—369 
Organized charities, 55, 56 
Overcrowding, 68 
Over-production, 294-296, 344, 345 

439 
Oyster-beds, property in, 129, 130 

Pain of labor, 322, 323 

Palgrave on prices, 194 

Panics, 295-299. See Crises. 

Paper money, 190, 229—231, 262, 263 

de Parieu, E., 447 

Partnership, 144 

Pastoral stage, 26-28 

Patents, 133, 134 

Paternalism, 12 ; of employers, 372 

Patten, S. N., on consumption, 70, 
322, 323 ; on rent, 293 ; on pro- 
tection, 439 

Pauper, Pauperism, 48, 51-56 ; im- 
migration, 418, 419 

Peasants, 307 

Peel, Robert, Bank Act, 252, 253, 
257 ; corn law repeal, 422 

Pensions, 62, 63, 395 

Physiocrats, 9 

Piece-work, Piece-wage, 301—304, 
316, 317 



INDEX. 



493 



Place value, lOO 

Pleasure and pain, balance of, 322, 

323 

Political corruption and tariff, 440 

Political economy, art of, 2, 12, 13 

Political money, 230 

Poll tax, 474 

Pools, 156-158 

Poor-law, English, 53-55 

Poor relief, 53-58 

Population, theory of, 41-51 ; move- 
ments of, 57, 337, 407, 417-422 

Possession and property, 30, 31 

Poverty, 39-63, 330-335 

Preventive checks to population, 42, 
48-50 

Price, 70, 72-96 ; general level of, 
193-198, 246, 249 ; public, 447- 

449 
Prison labor, 413-417 
Private vi^ealth, 3, 4, 10, 11. See 

Property 
Producers' cooperation, 379-382 
Producers' surplus, 90, gi 
Production, cost of, 123 ; process 

of 125-136 
Professional charges, 84, 364, 365 
Profits, 124, 264-300 ; justification 

of, II, 288 ; in trade, 103-105 ; 

limitation of, by law, 166-168 ; 

net, 267, 285-291 ; fall in, 339-342 
Profit-sharing, 373-378 
Progress, effect on investments, 292, 

293 
Progressive taxation, 465, 466 
Prohibition of liquor traffic, 67 
Property, 2-4 ; origin of, 30-32 ; in 
land, 127—133 ; corporate, 143- 
146 ; limitations on, 148-150 ; gov- 
ernment, 393-403 
Property tax, 463-465 
Protection, 135, 422-441, 477 
Proudhon, P. J., 15 
Prussian railroads, 400, 401 
Public health, 67 



Public income, 4-8 

Public land policy, 135, 136, 448 

Public policy and gambling, 98 

Public property, 4 

Public schools, 67, 334, 335 

Public wealth, 2, 3, 7, 8 

Public works, 56-58, 393-396, 481- 

484 
Publicity, 176-179, 348 

Quantity-theory of money, 197, 246, 
247 

Rae, John, i, 40, 342 ; on hours of 
labor, 404 

Railroads, 154-158, 162, 171-179 ; 
relations to labor, 357 ; govern- 
ment ownership, 398-400 

Rates, regulation of, 173-175 

Real estate as public wealth, 3, 4 ; 
as property, 127-133 ; losses on, 
269-274 ; taxation, 453, 468-473 

Real wages, 123, 301, 302, 309-311 

Reciprocity, 444 

Recoinage, 185 

Redeemable paper, 191 

Refunding, 477 

Rent, in medieval history, 35 ; 
economic, 88, 267, 285-291 ; and 
tariff, 434, 436 ; taxation of, 468- 
473 ; relation to price of products, 
470 

Rent charges, purchase of, 137 

Reserves, 181, 198-201 ; of banks, 
241-243, 249 

Residual theory of wages, 317-320 

Retail markets, 74 

Revenue, public, 447-484 

Ricardo, D., on money, 232 ; on 
rent, 287 ; on wages, 315, 316 

Ricca-Salerno on interest, 286 

Risk, compensation for, 97-100 ; 
bona Jide, III ; in productive in- 
dustry, 113-116 ; relation to inter- 
est, 279-283 



494 



INDEX. 



Roads, 394 

Rochdale pioneers, 383 
Rogers, J. E. Thorold, 406 
Rome, economic conditions in, 33 
Russia, emancipation in, 36-39 ; 
usury in, 140 ; coinage of pla- 
tinum in, 184 

Safety-fund system, 255 
Salaries, 121 

Sanitary regulations, 67, 413 
Saving, motives for, 138 ; excess of, 

147 ; and taxation, 463, 464 
Savings banks, 138, 139, 242 
Schoenberg, " Handbuch," 447 
Schoenhof, J., on wages, 303 
Schloss, D. F., 370, 378, 382 
Schulze-Delitzsch, 387 
Schulze-Gaevernitz, 303, 336 
Scotland, banking in, 253, 254 
Security and interest, 279-283 
Seigniorage, 187 
Seligman, E. R., 447-449 
Sensitive commodities, 327 
Sentiment, in economics, 17, 18 ; 

effect on prices, 73, 74 
Serfdom, 29, 34 
Services, included in vv^ealth, 342 ; 

price of, 431 
Settlement, Acts of, 53, 418 
Share rents, 35 
Shaw. G. B., I 
Shearman on taxation, 287 
Sherman act, 222, 223 
Shifting of taxes, 458-461 
Shipping, 441-443 
Short hours, 405-409 
Short-time loans, 200, 201 
Silver in United States, 190, 219- 

233 ; certificates, 191 ; ratio to 

gold, etc., 208-224 
Single tax, 468—474 
Sinking fund, 482, 483 
Slavery, relation to public wealth, 

3 ; history of, 27-39 



Sliding scale, 363, 364 

Smart, W., 363, 410 

Smith, Adam, general work, 10 ; on 

corn rents, 182 ; on protection, 

404 ; canons of taxation, 450, 451; 

on direct taxes, 460 
Social democrats, 355 
Social standards, 48, 49, 69 
Socialism, 16-18, 22, 165, 355, 387 
Socialistic theory of value, 93-96 ; 

of wages, 308 
Soetbeer, A., 194 
Southern States, slavery in, 37, 38, 

64 
Specialization, 350, 351 
Specific duties, 437, 457 
Speculation, 100-120, 123 ; in land, 

132, 471, 472 ; effect of inflation 

on, 231 
Speculator, 80 
Speed of work, 407, 408 
Spencer, H., The Man versus The 

State, 18 
Standard of life, 48, 69, 305, 306 
Standard of value, 205-223 
Standard Oil Company, 160, 163 
State, its relation to industry, 11, 12, 

390-403 
State credit, 58, 381, 382 
Static conceptions and problems, 5, 

23, 24 
Statistics, science of, 13 
Steel rails, 437 
Stock watering, 168 
Stoppage at source, 455 
Street railroads, 173 
Strikes, 352-357 
Struggle for existence, 19-23 
Subcontractor, 411-413 
Suffolk system, 255 
Subjective value, 91 
Subsidiary coin, 188, 224 
Subsidies, 135, 442, 443 
Sumner, W. G., I 
Sumptuary laws, 66 



INDEX. 



495 



Supply, 74, 87 

Surplus value, Marx's theory, 343 

Survival, 18-23 

Sweating system, 411-413 

Switzerland, taxation in, 466 

Symmetallism, 225 

Tabular standard, 207 

Tariff, customs, 135, 422-441, 457 

Taussig, F. W., on silver, 224 ; on 
wages, 301 ; on tariff history, 404 

Taxation, Taxes, 447-484 ; of unim- 
proved land, 132 ; exemptions 
from, 135, 453, 454, 465, 466 ; in 
railroad rates, 173 

Telegraph, 154, 170 

Telephone, 170, 171 

Tenant farms, 130, 131 

Tenement houses, 67, 68 

Thornton, on labor, 316 

Time value, lor, 105 

Time-wages, 302-304 

Tolls, 172 

Tooke, Thomas, 23? 

Total utility, 79 

Towns, free, 34 

Trade, ethics of, 10, 11, 94 

Trade option, 409 

Trades unions, 24, 352-369 

Transportation, 104, 126, 154, 171- 
I79> 337, 338; canal, 394-396; 
railroad, 399-400 

Treasury notes, 260-262 ; United 
States, 222, 223 

Truck, 122 

Trust funds, taxation of, 452 

Trusts, 158 

Under-consumption, 147, 148 

Unemployment, 405, 406 

Unions of labor, 352-369 

United States, conditions affecting 
population, 45, 50 ; public land 
grants, 135, 136 ; lack of directors' 
responsibility in, 178, 179 ; Treas- 



ury Department reports, 180 ; gold 
contracts in, 182 ; mint, 186 ; 
currency conditions, 190, 191 ; 
Senate Committee on Wages and 
Prices, 194 ; silver coinage in, 
220-223 ; currency in Civil War, 
228, 229 ; banks, 251 ; national 
banking law, 243, 256, 257, 261, 
262 ; railroad profits in, 281, 282 ; 
labor movements in, 353-355 ; 
cooperation in 380, 384 ; govern- 
ment ownership of monopolies, 
400-402 ; laws restricting immi- 
gration, 419, 420 ; tariff policy, 
422, 423, 435-438 ; shipping, 440, 
442, 443 ; reciprocity, 444 ; land 
policy, 448 ; war loans, 481 
Usage as basis of right, 33 
Usury, Usury laws, 139-143, 230 
Utility, 78 ; marginal, 79 ; of suc- 
cessive portions of income, 97-99, 
322 ; marginal, of gold, 198-205 

Valuation of taxable property, 452- 

457 
Value, gi-96 ; imputed, 274, 275 
Villeins, 29-34 
Volume of business, 196 

Wage-fund theory, 311-315 

Wages, 1 21-124, 301-335 ; nominal, 

231, 301, 302, 425 ; in commercial 

crises, 298, 299 ; real, 301, 302 ; 

and profits, 339-342 ; and tariff, 

425-431 
Wagner, A., on economic history, 

26 ; on finance, 447 ; on city real 

estate, 473 
Walker, F. A., on paper money, 

231 ; on prices, 246, 247 ; on 

wages, 301, 316, 317 
Walras, L., 79, 332 
Wants, satiation of, 324 
War, effect on institutions, 36 ; 



496 



INDEX. 



currency in, 261 ; and tariff, 440 ; 
loans, 480-482 

Waste, 123 

Water in stock, 168 

Waterworks, 154, 170 

Wealth, different modes of measur- 
ing, I-IO 

"Wealth of Nations," 10, 13 

Webb, Sidney and Beatrice, 336, 

363 
Weber's law, 78, 324, 325 
Webster, Daniel, on balance of 

trade, 427 



Weissmann on heredity, 19 

Wells, D. A., 447 

Wheat as basis of contracts, 182 

White, H., on money 180 ; on clear- 
ing-house loan certificates, 257 

Wholesale markets, 74 

Wieser, F. v., on value, 64; on 
interest and wages, 274 

Women's work, 345-349, 410, 411 

Workhouse test, 53-55 

Workingmen, condition of, 320-352. 
See Labor. 

Wright, C. D., 347, 348 



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A History of Money and Prices. Being an Inquiry into their 
Relations from the Beginning of the Thirteenth Cenlury to the Present 
Time. By J. Schoenhof, author of " The Economy of High Wages," 
etc. " Questions of the Day " Series No. 86. 12° . . . $1 50 

b 

G. P. PUTNAM'S SONS, NEW YORK AND LONDON. 












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